|UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington,
DC 20549


FORM 10-K
|-------------------------------------------------------------------------------

|[X] |  | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934For the
fiscal year ended September 30, 2001or
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|[_] |  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ---------------------------------------------------------------------------------------

|Commission File No.
0-13143


INNOVEX, INC.(Exact
name of registrant as specified in its charter)
|-------------------------------------------------------------------------------------------------

|Minnesota(State or other jurisdiction ofincorporation or organization) | 41-1223933(IRS EmployerIdentification No.)
|---------------------------------------------------------------------- | ------------------------------------------

|5540 Pioneer Creek DriveMaple Plain, Minnesota(Address of principal executive offices) | 55359-9003(Zip Code)
|-------------------------------------------------------------------------------------- | --------------------

|Registrants telephone
number, including area code: (763) 479-5300


Securities registered
pursuant to Section 12 (b) of the Act:None


Securities registered
pursuant to Section 12 (g) of the Act:


(Title of
Class)Common Stock
($.04 par value)


Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject
to such filing requirements for the past 90 days. Yes   [X]      No  [_]


Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S229.405
of this chapter) is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]


The aggregate market value
of the voting stock held by non-affiliates of the Registrant was approximately
$52,411,000 at November 23, 2001 when the closing sale price of such stock, as
reported in the Nasdaq National Market System, was $3.70.


The number of shares
outstanding of the Registrants Common Stock, $.04 par value, as of
November 23, 2001 was 15,044,249 shares.


Documents Incorporated by Reference:


1. Portions of the
Registrants Proxy Statement to be filed with the Commission within 120
days after the end of the Registrants fiscal year are incorporated by reference
into Part III of the Form 10-K.
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|INNOVEX, INC.



PART I


ITEM 1. BUSINESS



(a) GENERAL DEVELOPMENT
OF BUSINESS


Innovex
was founded in 1972 to acquire the assets of a manufacturer of needle and wire
assemblies used in computer core memories. With the introduction of solid state
memory devices, needle wire assemblies became obsolete and, in late 1973, the
Company moved into related areas of manufacturing utilizing and expanding its
micro-welding and miniature assembly expertise.


Prior
to fiscal 1999, the Company primarily operated through two divisions, Precision
Products (Precision) and Litchfield Precision Components (LPC). Each division
had its own administrative, engineering, manufacturing and marketing
organizations. During the quarter ending September 30, 1998, the Company
combined the operations of its two core operating divisions, Precision and LPC
into one operating division, Innovex Precision Components. The combination
merged the rapidly growing LPC flexible circuit fabrication and chemical etching
operations with Precisions high volume fine wire manufacturing expertise.
The combination also allowed Innovex to leverage Precisions disk drive
industry market and trade knowledge to disk drive industry flexible circuit
applications as the industry transitioned from wire interconnects.


Prior
to the divisional combination, the largest division, Precision, developed,
engineered and manufactured specialty precision electromagnetic products for
original equipment manufacturers (OEMs). Lead wire assemblies
for the thin film disk drive market were the divisions primary product.
Lead wire assemblies are fine twisted magnet wires that connect the back end
electronics of a disk drive with the inductive or magneto resistive thin film
heads that read and write information on the disk. After the divisional
combination, the lead wire assembly revenue declined as anticipated. As a
result, during the fiscal 1999 fourth quarter, charges of $2.8 million were
recorded to account for the discontinuance of this product line.


LPC,
prior to the fiscal 1998 divisional combination, designed and manufactured
highly complex flexible circuitry and chemically machined components for
computer, computer peripheral, medical and other applications. The Company
purchased Litchfield Precision Components, Inc. on May 16, 1996. This
acquisition reduced the Companys reliance on the disk drive industry while
providing an entry into the large and rapidly growing flexible circuit market.
Innovexs flexible circuit operation is one of a limited number of
operations in the world able to produce flexible circuits with line and spacing
tolerances of less than 2 mils for the high-end portion of the flexible circuit
market.


The
Iconovex subsidiary, established in fiscal 1994 to market and further develop a
technologically advanced software product, was discontinued in June 1999 with a
$1.7 million charge recorded related to this disposition.


Innovex,
Inc. and its subsidiaries (the Company) purchased all of the
outstanding shares of ADFlex Solutions, Inc. (ADFlex) in two parts
on August 9, 1999 and September 14, 1999. The total ADFlex purchase price,
including transaction costs, change in control payments and all of the issued
and outstanding common stock was approximately $37 million. At that time, the
Company also obtained credit facilities totaling in principal amount $40
million, which were utilized to refinance ADFlexs outstanding debt, pay
down current liabilities and pay related transaction costs. Prior to the
acquisition, ADFlex was a leading supplier of flexible circuit based solutions
to the computer, computer peripheral, communications and consumer electronics
industries. Applications for these flex-based interconnects include cellular
phones, hard disk drives, other storage systems, high-end consumer products,
notebook computers, pagers and personal communication systems. ADFlexs
diverse customer and industry base has reduced Innovexs reliance on the
disk drive industry. Prior to the ADFlex acquisition, the Company had one
primary operating group, Innovex Precision Components. The Company combined its
operations into one group that designs and manufactures flexible circuits.


1
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|Innovex,
Inc. was incorporated under the laws of the State of Minnesota in 1972. Its principal
executive offices are located at 5540 Pioneer Creek Drive, Maple Plain, Minnesota
55359-9003 and its telephone number is (763) 479-5300. Products are developed and
manufactured through the Companys wholly owned subsidiaries, Innovex Precision
Components, Inc., Innovex Southwest, Inc., Innovex (Thailand) Ltd. and Innovex Limited.
Innovex Precision Components, Inc. and Innovex Ltd. are Minnesota corporations. Innovex
Southwest, Inc. is a Delaware corporation and Innovex (Thailand) Ltd. is a Thailand
corporation.



(b)   FINANCIAL
INFORMATION ABOUT INDUSTRY SEGMENTS


Prior
to the ADFlex acquisition, the Company had one major operating unit during
fiscal 1999. The Company also had one other subsidiary, Iconovex and its Smart
Solution joint venture, which generated less than 1% of the Companys
revenue and was not considered a core segment due to its immaterial nature. The
Company currently consists of one segment that manufactures and markets flexible
circuits to various industries and financial results will be presented as a
single segment. Topics covered throughout this document may be discussed
referencing former separate operations where helpful to the readers
understanding.


(c)   NARRATIVE
DESCRIPTION OF BUSINESS


Company
Overview


Innovex
is a leading worldwide provider of flexible circuit interconnect solutions to
original equipment manufacturers (OEMs) in the electronics industry.
The Company offers a full range of customized flexible circuit applications and
services from initial design, development and prototype to fabrication, assembly
and test on a global basis. The Company targets high-volume markets where
miniaturization, form and weight are driving factors and flexible circuits are
an enabling technology. Applications for flexible circuits currently addressed
by the Company include notebook computers, portable communication devices such
as cellular telephones and pagers, data storage devices such as hard disk drives
(HDDs), tape drives and arrays and high-end consumer electronics
products such as digital video disk (DVD) and compact disk (CD) players. The
Companys principal customers include Alps, Compaq, Dell, Digital
Equipment, Hewlett Packard, IBM, Iomega, Littelfuse, Maxtor, Motorola, Nokia,
Philips, Qualcomm, Quantum, ReadRite, SAE Magnetics, Samsung, Seagate, Staktek,
Storage Tek, Xerox and other leading electronic OEMs.


Flexible
circuits consist of copper conductive patterns on flexible substrate materials,
such as polyimide, and provide electrical connection between components in
electronic systems. Flexible circuit interconnects frequently incorporate
components such as integrated circuits (ICs), connectors,
stiffeners, resistors and capacitors mounted directly on a flexible circuit.
With proliferation of electronic applications, electronic products have become
smaller, lighter and more portable. To meet the challenges represented by the
increased complexity of miniaturization, form and weight requirements, OEMs have
increasingly turned to flexible circuit interconnect solutions because they
decrease the weight and expense of connectors and other packaging components,
conform to contoured, ergonomic shapes or small spaces and provide mechanical
flexure. The Companys products consist of flexible circuits with high to
mid-range tolerances and may include other secondary finishing or assembly
operations. The high-end flexible circuits generate the highest gross margin
percents. The mid-range or standard flexible circuits with components added
through the performance of additional assembly steps garner lower gross margin
percents due to higher material costs and the increased number of competitors.


Historically,
the Companys wire operations produced a variety of small lead wire
assemblies primarily for computer disk drives. The disk drive industry has
transitioned away from lead wire assembly interconnects to integrated
interconnects such as the Companys Head Interconnect Flex
(HIF), Flex suspension assembly (FSA) and BridgeFlex
(BFC) products. This transition has had a significant impact on the
Companys operations over the last three years as it has had to manage the
rapid increase in its flexible circuit business while controlling the rapid drop
in its lead wire assembly operations. Lead wire assembly sales constituted none
of fiscal 2001 consolidated revenues, less than 1% of fiscal 2000 revenues, 26%
of fiscal 1999 revenues and over 72% of fiscal 1998 revenues.


2
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|While
the trend toward miniaturization and portability increases product complexity,
electronic OEMs face escalating time to market, cost and global sourcing
requirements. In response, the Company has established manufacturing facilities
in Thailand that have lower cost structures and closer proximity to the
Companys OEM customer base. The Company believes it is a preferred
supplier for the majority of its customers high-end, high-volume flexible
circuit interconnect requirements.


Industry
Overview and Trends


Flexible
circuit interconnects provide electrical connection between components in
electronic systems and are increasingly used as a platform to support the
attachment of electronic devices. Flexible circuits offer several advantages
over rigid printed circuit boards (PCBs) and ceramic hybrid
circuits, particularly for small, complex electronic systems. Flexible circuits,
due to their mechanical flexure and three-dimensional shape, accommodate
packaging contours and motion in a manner that traditional two-dimensional rigid
PCBs cannot. Flexible circuits also provide improved thermal dissipation and
signal propagation as compared to PCBs. In addition, flexible circuits can
reduce the size, weight and expense of: (i) the primary substrate for component
attachment when flexible circuits are used in place of a PCB; (ii) connectors,
cables and other interconnection schemes when flexible circuits provide the
connection to other substrates or subsystems within the system; and (iii)
individual IC die packages by bonding an IC directly to a flexible chip carrier
rather than a ceramic or plastic package.


These
capabilities enable circuits to solve many of the challenges faced by electronic
OEMs who currently use traditional interconnection devices. Products which
currently use polyimide flexible circuit interconnect assemblies include
notebook computers, portable communication devices such as cellular telephones,
pagers and personal digital assistants (PDAs), printers, scanners
and data storage devices such as HDDs, tape drives and arrays, and high-end
consumer electronic products such as DVD and CD disk players, cameras and
camcorders. New, rapidly growing applications for polyimide flexible circuit
interconnect assemblies include high-density interposers and other chip carrier
packaging applications.


The
Company considers the following trends important in understanding the electronic
flexible circuit interconnect industry:


Miniaturization,
Portability and Complexity of Electronic Products  Electronics OEMs
continue to design and introduce more compact and portable high-performance
products with greater functionality. The complexity of these new products
requires smaller size, lighter weight, greater circuit and component density,
better thermal dissipation properties, higher frequencies and increased
reliability as compared to conventional rigid board assemblies. These
requirements necessitate greater sophistication in flexible circuit interconnect
manufacturing and process technologies. The trend toward increasingly
sophisticated products also requires greater engineering expertise and
investment in manufacturing and process technology for suppliers to produce
high-quality electronic interconnect products on time, in volume and at
acceptable cost.


Shorter
Product Life Cycles and Time to Market  Rapid advances in technology have
significantly shortened the life cycle of complex electronic products and placed
increased pressure on OEMs to quickly develop and introduce new products. These
time-to-market challenges have in turn increased OEMs emphasis on the
development, design engineering, prototype development and ramp-to-volume
capabilities of their suppliers. In addition, the importance of being first to
market with new products has heightened the emphasis on shortening supply
channels, reducing the number of suppliers and finding turnkey sourcing
capabilities that are supported by technologically advanced manufacturing
infrastructure.


Globalization
and Reduction of Manufacturing Costs  At the same time that shorter
product life cycles increase time-to-market pressures, users continue to demand
increased electronic performance at lower prices. Notable product examples of
this trend are notebook computers, desktop computers, peripherals, portable
communications and consumer electronics. Leading OEMs who often manufacture
products in multiple geographic regions are relying more on suppliers with
global sourcing capabilities which can help to shorten
the OEMs supply chain and provide regionally competitive pricing. As part
of global sourcing, OEMs increasingly require their suppliers to establish local
infrastructure to provide proximity to engineering, manufacturing and sales
support.


3
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|Outsourcing
 To avoid delays in new product introductions, reduce manufacturing costs
and avoid logistical complexities, OEMs are increasingly turning to fewer
suppliers which are capable of producing electronic interconnect products from
development, design, quick-turn prototype and pre-production through volume
production and assembly. Many OEMs have accelerated this process by outsourcing
their captive component, subsystem and even system manufacturing to focus on
their core competencies. The accelerated time-to-market and time-to-volume needs
of OEMs have resulted in increased collaboration with qualified suppliers
capable of providing a broad and integrated offering. To meet their rapidly
changing electronic interconnect requirements, many OEMs have moved to limit
their vendor base to a smaller number of technically qualified, strategically
located suppliers capable of providing both quick-turn prototype and
pre-production quantities as well as cost-competitive volume production
quantities.


Proliferation
of Electronics and Creation of New Markets  The markets for electronic
products are growing as a result of technological change, increasing demands for
a wider variety of electronic product features and more powerful and less
expensive electronic components. Due to this growth, new markets have emerged in
computing, data communications, telecommunications and multimedia. Moreover,
existing markets such as computer networking and peripherals, digital and mobile
communications, video-on-demand, the Internet, instrumentation and industrial
controls have significantly expanded product applications.


Current
Product Applications


The
Company provides flexible circuit interconnect products to a diverse group of
markets. Historically, the HDD market has represented the largest component of
the Companys sales at 68%, 59%, and 74% of total sales for 2001, 2000 and
1999. Through the ADFlex acquisition and new market expansion efforts, the
Company is continuing its efforts to reduce the impact of cyclicality of the HDD
industry on its business. However, net sales attributable to this market are
expected to continue to represent a large component of total sales for the
foreseeable future. Accordingly, the occurrence of significant slowdowns or
changes in this industry has had and may continue to have a material adverse
effect on the Companys operating results.


Current
applications addressed by the Company include:


Flex
Suspension Assembly  The disk drive market uses flexible circuits as the
interconnect between the read/write head and disk drive electronics. In these
applications, circuits need to mechanically flex hundreds of millions of times
through the life of the drive. These applications include the Companys
head interconnect flex (HIF) and Flex Suspension Assembly
(FSA) which provide the electrical interconnect from the disk drive
head to the back end electronics (actuator flex) of the disk drive. The HIF is
bonded to a disk drive suspension by the Companys customers. The Flex
Suspension Assembly (FSA) is a HIF that is bonded to a suspension
for customers desiring a more complete solution. During fiscal 2001, the company
introduced the Flex Gimbal Suspension Assembly (FgSA). The FgSA is
the next generation FSA that provides improved technical performance at a lower
cost than competing products by increasing the utilization of the flexible
circuit characteristics and simplifying the suspension used in the assembly.
These interconnects were provided by lead wire assemblies produced by the
Company prior to the use of flexible circuits.


Data
Storage  The data storage market includes interconnects used for tape
drives, disk arrays, and other interconnects in hard disk drives. Large
individual drive storage systems are being replaced by arrays of less expensive
disk drives or tape drives. The growth of personal computer networks has
generated a growth in small arrays for local area network storage. In addition
to the flexible circuit interconnects inside each of the individual drives,
controlled impedance flex interconnects are used to connect the back of the
drives to standard interface boards. The Company also produces the actuator flex
which provides the back end electronic interconnect for hard disk drives.
Mounting an unpackaged die directly onto the flexible circuit substrate, or flip
chip, is becoming the predominant interconnect technology for these
applications.


4
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|Consumer
Electronics  The consumer market includes interconnects used for CD and
DVD applications, portable telecommunications devices, computers and printers.
CD and DVD consumer applications are growing rapidly. These devices use flexible
circuits as the interconnect between the read/write head and CD/DVD drive
electronics. The use of polyimide flexible circuits in portable communications
devices is growing as the space, weight and functionality challenges are
becoming more difficult. In some cellular telephones, flexible circuits replace
rigid PCBs, connectors and cables and can thereby reduce space, weight and cost.
Early applications for flexible circuits in notebook computers were mainly as
interconnects from the motherboard to the LCD and as shielded jumpers. More
recently, systems have used as many as ten flexible circuit interconnects per
notebook, including PCMCIA connector/flex jumpers, LED/speaker flexible circuit
assemblies, track ball/mouse button flexible circuit assemblies and various
other shielded jumpers.


New
Ventures  The new venture markets include flexible circuits for integrated
circuit substrates, optoelectronic interconnects for broadband applications,
flexible circuits for display applications and other high-end flexible circuits
markets. These markets are projected to have rapid growth in the near future and
the Company is producing increasing levels of flexible circuits for these
markets.


Sales and
Support


The
Company markets its products directly to a number of industries requiring
electronic interconnects through the use of an internal sales staff.
Historically, the Company has sold a substantial portion of its flexible circuit
interconnects to a limited number of customers. Innovex has benefited from early
entry as a supplier to the disk drive industry and has been able to leverage
relationships to the next generation integrated flexible circuit interconnects.
This, coupled with the Companys reputation for high standards of quality
and innovative manufacturing processes, has established Innovex as a predominant
supplier of interconnects for the industry. The Companys principal
customers, each accounting for over 10 percent of the Companys
consolidated net sales in at least one of the last three years are Maxtor and
Seagate. See Note I of Notes to Consolidated Financial Statements for additional
information.


Because
of the Companys focus on leading edge imaging technology, its customers
include a number of the leading technology companies in the world including
Alps, Compaq, Dell, Digital Equipment, General Electric, Hewlett Packard, IBM,
Iomega, Littelfuse, Lucent, Maxtor, Medtronic, Motorola, Nokia, Philips,
Qualcomm, Quantum, ReadRite, SAE Magnetics, Samsung, Seagate, Staktek, Storage
Technology, Xerox and other leading electronic OEMs.


Even
though the Companys customer mix will change from period to period in the
future, the Company expects that sales to relatively few customers will continue
to account for a high percentage of its net sales in the foreseeable future. The
loss of a significant customer or a substantial reduction in orders by any
significant customer, including reductions due to market, economic or
competitive conditions in the computer, computer peripheral, communications and
high-end consumer markets has had and may continue to have a material adverse
effect on the Companys business, financial condition, results of
operations and cash flows.


Research and
Development


The
Company continually engages in research, development and engineering activities.
The Companys goals are to utilize these activities to improve and enhance
existing products and to develop new products in order to expand its market
share. During fiscal years 2001, 2000 and 1999, the Company spent approximately
$4,518,000, $3,472,000, $2,878,000 on research and development. The
Companys research and development effort is concentrated on improving and
increasing long run flexible circuit manufacturing capabilities for both
adhesiveless and adhesive based flexible circuits, developing new materials,
developing processes for manufacturing new products, developing new FSA and FgSA
generations and improving the FSA attachment process.


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|The
Company expects to continue its past practice of acquiring new technology from
outside sources through the payment of cash, Company stock and royalties.


Environmental
Controls


Flexible
circuit interconnect manufacturing requires the use of chemicals. As a result,
the Company is subject to a variety of environmental laws relating to the
storage, discharge, handling, emission, generation, manufacture, use and
disposal of chemicals, solid and hazardous waste and other toxic and hazardous
materials used to manufacture the Companys products. The Company has
discontinued operations in its Chandler Arizona location and is currently
decommissioning the facility. A preliminary review of the facility indicates
that no material remediation costs will be required. However, given the
uncertainties associated with environmental contamination, there can be no
assurance that such costs will not have a material adverse impact on the
Company. Pursuant to the agreements governing the 1993 ADFlex purchase of
certain assets from the Rogers acquisition, Rogers Corporation has retained all
environmental liabilities relating to the purchased assets prior to the closing
date of the acquisition. While Rogers currently has sufficient assets to fulfill
its obligations under the acquisition agreements, if environmental liabilities
requiring remediation are discovered and the Company were unable to enforce the
acquisition agreement against Rogers, the Company could become subject to costs
and damages relating to such environmental liabilities. Any such costs and
damages imposed on the Company could materially adversely affect the Company.


The
Company believes it has been operating its facilities in substantial compliance
in all material respects with existing environmental laws and regulations.
However, the Company cannot predict the nature, scope or effect of legislation
or regulatory requirements that could be imposed or how existing or future laws
or regulations will be administered or interpreted with respect to products or
activities to which they have not previously been applied. For this reason, the
Company implemented procedures geared toward minimizing the negative impacts and
reducing potential financial risks arising from environmental issues. Compliance
with more stringent laws or regulations, or more vigorous enforcement policies
of regulatory agencies could require substantial expenditures by the Company and
could adversely affect the results of operations of the Company. The Company
does not anticipate any material amount of environmental-related capital
expenditures in fiscal 2002.


Backlog


The
backlog for the Companys continuing operations was $20.1 million, $19.1
million, $36.6 million at September 30, 2001, 2000 and 1999. The Companys
backlog fluctuates based on the timing of the receipt of orders from customers.
Backlog is defined by the Company as firm orders that are scheduled to be
delivered within 12 months from the date of the order. While the Company
currently believes substantially all of its September 30, 2001 backlog will be
delivered within 12 months, customers may determine not to release orders into
production, may extend requested delivery dates or cancel orders. In such cases,
the Company may not realize the revenue indicated by the backlog.


Competition


The
flexible circuit interconnect market is differentiated by customers, markets and
geography with each niche having its own combination of complex packaging and
interconnection requirements. The Company believes it competes principally on
the basis of design capability, price, quality, flexibility and technological
advancements in underlying applications. During periods of economic slowdown in
the electronics industry and other periods when excess capacity exists,
electronic OEMs become more price sensitive. The Company believes that once a
customer has selected a particular vendor to design and manufacture a flexible
circuit interconnect, the customer generally relies upon that vendors
design for the life of that specific application and, to the extent possible,
subsequent generations of similar applications. Accordingly, it is difficult to
achieve significant sales to a particular customer with respect to any
application once another vendor has been selected to design and manufacture the
flexible circuit interconnect used in that application. While this market
paradigm may provide a barrier to the Companys competitors in the markets
served by the Company, it also may present an obstacle to the Companys
entry into other markets.


6
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|The
flexible circuit interconnect market is highly competitive. The Company
experiences competition world-wide from a number of leading foreign and domestic
providers such as Minnesota Mining and Manufacturing (3M) and
Sumitomo for high-end applications, and Nippon Mektron (NOK),
Fujikura Ltd. (Fujikura), Multi-Fineline Electronix, Inc.
(M-Flex), Sheldahl Inc. (Sheldahl) and Parlex
Corporation (Parlex) for mid-range applications. 3M, Sumitomo, NOK
and Fujikura are substantially larger than the Company with greater financial
and other resources. M-Flex, Sheldahl and Parlex are US-based flexible circuit
manufacturers that have lower sales of polyimide flexible circuits than the
Company and have historically targeted suppliers of computers, communication and
automotive services and the military. Expansion of the Companys existing
products or services could expose the Company to new competition. Moreover, new
developments in the electronics industry could render existing technology
obsolete or less competitive and could potentially introduce new competition
into the market. There can be no assurance that the Companys competitors
will not develop enhancements to, or future generations of, competitive products
or services that will offer superior price or performance features to those of
the Company or that new competitors will not enter the Companys markets.
Finally, as many of the Companys competitors are based in foreign
countries, they have cost structures and prices based on foreign currencies.
Accordingly, currency fluctuations could cause the Companys dollar-priced
products to be less competitive than its competitors products priced in
other currencies.


The
Company also competes in assembly matters with leading flexible circuit assembly
providers such as Smartflex Systems, Inc. (Smartflex) and Pemstar.
The Company believes that competition in assembly is primarily driven by
availability of assembly technology, price and cycle time. The Company believes
it competes favorably with these competitors because it offers its customers a
complete flexible circuit interconnect solution including design, fabrication,
assembly and testing.


The
Companys competitors can be expected to continue to improve the design and
performance of their products and to introduce new products with competitive
price/performance characteristics. Competitive pressures often necessitate price
reductions that adversely affect operating results. The Company will be required
to make a continued high level of investment in product development and
research, sales and marketing, and ongoing customer service and support to
remain competitive. There can be no assurance that existing or future
competitors will not be able to duplicate the Companys strategies or that
competitive pressures faced by the Company will not have a material adverse
effect on the Company.


Employees


As
of September 30, 2001, the Company had a total of 3,465 employees. Of these
employees, 178 were based at the Companys Maple Plain, Minnesota facility;
39 were based in Chandler, Arizona; 247 were based in Litchfield, Minnesota; 5
were based in Agua Prieta, Mexico and 2,996 were based in Thailand. The Company
has transferred operations from its Chandler, Arizona facility to Minnesota and
Lamphun Thailand. The Company discontinued operations in Mexico in fiscal 2000
and the remaining Mexican employees will be paid severance in accordance with
Mexican labor laws once the facility disposition is complete.


The
Companys future operating results depend in part upon its ability to
attract and retain other qualified management, technical, manufacturing, sales
and support personnel for its operations. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The failure to attract or retain such
persons could materially adversely affect the Company.


Intellectual
Property


The
Company believes that, due to its customers demands for rapid
technological advances and the resulting limited product life cycles, the
success of its business generally depends more on the technical and engineering
expertise, creativity and marketing, and service abilities of its employees than
on patents, trademarks and copyrights. Nevertheless, the Company owns patents
and has a policy of seeking patents when appropriate on inventions concerning
new products and improvements as part of its ongoing research, development and
manufacturing activities. The Company does control patents related to the FSA
and new generation FgSA products and believes that these patents give the
Company a competitive advantage within disk drive industry applications. There
can be no assurance that any patents issued to the Company will provide a
competitive advantage or will not be challenged by third parties, or that the
patents of others will not have an adverse effect on the Companys ability
to do business. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Companys products or
design around the patents issued to the Company. In addition, there can be no
assurance that foreign intellectual property laws or the Companys
agreements will protect the Companys intellectual property rights in any
foreign country. Any failure to protect the Companys intellectual property
rights could have a material adverse effect upon the Company.



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|Suppliers


The
Company purchases raw circuit materials, process chemicals and various
components from multiple outside sources. For components, the Company typically
makes short-term purchasing commitments to key suppliers for specific customer
programs. These commitments are usually made for three to twelve month periods.
These suppliers commit to providing cooperative engineering, as required, and in
some cases maintain a local inventory to provide shorter lead times and reduced
inventory levels for the Company. In most cases, suppliers are approved, and are
often dictated by the Companys customers. For process chemicals, the
Company relies on a limited number of key suppliers. Alternate chemical products
are available from other sources, but process chemical changes would often
require requalification of the processes, which could take weeks or months to
complete. The Company has attempted to mitigate these risks by identifying
stable companies with leading technology and delivery positions.


The
Company currently purchases a number of its components, process chemicals and
other materials from single sources. In the United States, these products are
available only from a limited number of suppliers. There can be no assurance
that these sources will continue to supply the Company with the materials needed
at competitive prices. While viable alternate suppliers exist, because of the
Companys limited inventory of raw materials, tight manufacturing cycles
and the significant amount of time required to qualify new suppliers, single
sourcing is expected to continue. Consequently, any unanticipated interruption
of material supplies or components would have a short-term material adverse
effect on the Company.


Technology


Design
Technology  The flexible circuit interconnects manufactured by the Company
are designed specifically for each application, requiring significant joint
design activities between the Company and the customer at the start of a
project. The Company has developed design methodologies that solve difficult
interconnection problems and save the customer time and money. The Company also
designs and produces, in volume, flexible circuits that range from high-density,
single-sided circuits to more complex double-sided and multi-layer circuits. The
Company is continually investing in and improving its computer-based design
tools to more quickly design new flexible circuit interconnects, to enhance
cooperative design and communication with its customers and to more closely link
designs to the manufacturing process. The Company is recognized as a technology
leader in fine-line, single-sided flexible circuit technology and flexible
circuit assembly technology, including advanced chip-on-flex, flip-chip-on-flex
and high-density polyimide assembly technologies.


Circuit
Fabrication Technology  The Company has extensive experience in fine-line
polyimide flex and has pioneered manufacturing processes that deliver high unit
volumes at cost-effective yields. At the core of the process is roll-to-roll
subtractive fine-line circuit processing. The starting materials are flexible
laminates composed of a thin dielectric film that is either adhesive-bonded to
treated copper foil or metalized without the use of adhesives. Very accurate
images (down to 0.001) are produced in volume in photoresist. Circuit
conductors are then formed by chemically etching the underlying copper foil.
Coverfilm materials are adhered to the circuitry to provide an insulative
coating and to expose contact pads for surface metalization. The exposed
surfaces are then coated with solder for surface mount or bondable gold for
chip-on-flex applications. Laser processing is then used to create various
openings to drill vias and cut contoured peripheries in substrate materials.


8
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Companys key flexible circuit fabrication technologies include:
|--------------------------------------------------------------------

| | Fine
Feature Roll-to-Roll Imaging and Etching  Allows the fabrication of circuits with very
fine line widths and spaces. This is critical to meeting complex space constrained
interconnection needs. Processing wide web (up to 24 inches) in a continuous roll-to-roll
format (as opposed to discrete panels) allows fabrication of high circuit volumes with
improved material utilization resulting in lower cost.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Laser
Processing  Laser technology is used to produce low cost, very fine openings, small
vias and contoured shapes that solve density problems while avoiding more expensive
traditional alternatives. Also, using a laser to cut the periphery of parts allows
prototypes and low volume production parts to be built faster and without the cost of
blanking die.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Bondable
Gold Plating  Prepares flexible circuits for chip-on-flex bonding, a process which
saves space and improves electrical performance (access time) by wire bonding an IC die
directly to the flexible circuit.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Coverfilm,
Lay-up and Lamination  A process where coverfilm materials are adhered to the circuitry
to provide an insulative coating and to expose contact pads for surface metalization.
This process allows accurate positioning of solder plated pads to support fine pitch
surface mount assembly to the finished circuits.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Assembly
and Test Technology  The Company applies advanced assembly and test technology to
provide flexible circuit interconnect assemblies to its customers. The Company assembles
passive electrical and various mechanical components, including connectors, stiffeners,
diodes, formed metal parts and other devices to its flexible circuits using primarily
manual processes in its plants in Thailand. The Company also performs advanced direct die
attach and assembly of integrated circuit devices as well as the functional testing of
these flexible circuit assemblies. Assembling these components directly onto the flexible
circuit increases performance and reduces space, weight and cost.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Flex
Suspension Assembly  The Company has a proprietary automated process to attach flexible
circuits to suspensions for disk drive applications.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

|Manufacturing


The Company
has developed a manufacturing process that combines the use of technology with
the deployment of human resources in a geographic and organizational manner that
allows the Company to compete on a pure cost basis, if necessary, with suppliers
of similar products throughout the world. Quality systems are in place that are
certified to standards set by demanding customers in the electronics industry.
The Minnesota and Lamphun Thailand operations have received ISO 9002
certification.


The
Company believes it enjoys an advantage based on a manufacturing process
designed to optimize the utilization of automation, labor and capital, and a
manufacturing process and technology with better yield, material utilization and
throughput relative to its competitors. Most of the automated circuit
fabrication processes are performed in Minnesota where there is an ample supply
of qualified technical resources with the more labor intensive processes
performed in Thailand to remain competitive with low cost Asian based
competitors. The Company also believes that integrating assembly technology with
manufacturing technology and high-volume production capabilities will over time
provide improvements in its production costs through higher product yields,
faster production ramps, reduced inventories, shortened production cycle times
and increased leverage over expenses.


Foreign Sales
and Operations


The
Company has finishing, assembly and inspection facilities located in Korat and
Lamphun, Thailand. While the Company believes it has established good
relationships with its local labor forces and the local governments, the spread
of the manufacturing process over multiple countries subjects the Company to
risks inherent in international operations. Those risks include currency
fluctuations, inflationary pressures,
unexpected changes in regulatory requirements, tariffs and barriers, potentially
limited intellectual property protection, potential cross border shipment
delays, changes in political climate, difficulties in coordinating and managing
foreign operations, foreign labor issues, increases in employee turnover and
potentially adverse tax consequences. Any of the foregoing could have a material
adverse effect on the Company.


9
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|While
Innovex transacts business predominantly in U.S. Dollars an increasing portion
of its sales and expenses are denominated in foreign currencies. Changes in the
relation of foreign currencies to the U.S. Dollar will affect the Companys
cost of goods sold and operating margins and could result in exchange losses. To
reduce the impact of certain foreign currency fluctuations, the Company enters
into short-term forward foreign currency exchange contracts (hedges) in the
regular course of business. The forward exchange contracts generally require the
Company to exchange foreign currencies for U.S. Dollars at maturity, at rates
agreed to at inception of the contracts. The gains or losses on hedges of
transaction and remeasurement exposure are included in income in the period in
which the exchange rates change. The gains and losses on unhedged foreign
currency transactions are included in income as incurred. No assurance can be
given that the Companys hedging strategies will prevent future currency
fluctuations from adversely affecting the Company.


A
large portion of the sales and expenses for the Thailand operation are
denominated in Thai baht. The Thai Baht experienced significant fluctuations in
relation to the U.S. Dollar during portions of 2001, 2000 and 1999. The
fluctuations did not have a significant impact on the Companys results of
operations for those years. However, there can be no assurance that future
currency fluctuations will not have a material adverse effect on the Company.


ITEM 2. PROPERTIES


In
total, at September 30, 2001, the Company leased or owned approximately 725,000
square feet of manufacturing and other space. The Companys significant
facilities are as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Functions                        | Location (number of facilities) | Square Feet                  | Owned/Leased | Expiration
|-------------------------------- | ------------------------------- | ---------------------------- | ------------ | ----------
|Executive Offices, Research      |                                 | Maple Plain, Minnesota (one) |              | 96,000    
|and Development and              |                                
|Circuit Fabrication              |                                
|Held for disposition             |                                 | Chandler, Arizona (one)      |              | 150,000   
|                                 |                                
|Held for disposition             |                                 | Agua Prieta, Mexico (one)    |              | 161,000   
|                                 |                                
|Circuit inspection and finishing |                                 | Korat Thailand (two)         |              | 12,000    
|                                 |                                 |                              |              | 8,000     
|                                 |                                
|Circuit Finishing and Assembly;  |                                 | Lamphun Thailand (two)       |              | 15,000    
|Sales and Support                |                                 |                              |              | 140,000   
|                                 |                                
|Circuit Fabrication              |                                 | Litchfield, Minnesota (five) |              | 63,000    
|                                 |                                 |                              |              | 15,000    
|                                 |                                 |                              |              | 10,000    
|                                 |                                 |                              |              | 51,000    
|                                 |                                 |                              |              | 4,000     

|The
Company constructed the building in Maple Plain, Minnesota to be used for
manufacturing, research and development and corporate offices. The Company
obtained the Arizona, Mexico and Lamphun Thailand facilities during fiscal 1999
as part of the ADFlex acquisition. The Lamphun Thailand facility was completed
in February 1999 and is used for circuit finishing and assembly. Operations have
been discontinued at the Mexico and Arizona facilities to reduce excess
manufacturing capacity. The Korat Thailand facilities were obtained in fiscal
2000 as part of the Thailand subcontractor purchase. The Company believes that
the facilities in Minnesota and Thailand are adequate to meet its current
requirements and that suitable additional space or substitute space is readily
available as needed.


10
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 3. LEGAL PROCEEDINGS


On
November 15, 2001, Bank Boston Robertson Stephens was granted a summary
judgement by the United States District Court, District of Minnesota for
$800,000 against the Company related to disputed investment banking fees
incurred by ADFlex Solutions Inc. during the acquisition of ADFlex by the
Company in Fiscal 1999. The Company will record an additional expense of
$350,000 during the quarter ending December 2001 to cover the unaccrued portion
of this judgment. With the exception of this judgment, neither the Company nor
any of its subsidiaries is a party to, and none of its property is the subject
of, any other material pending legal proceedings.


ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS


The
Registrant did not submit any matter to a vote of its security holders during
the fourth quarter of the fiscal year covered by this Report.


ITEM 4A. EXECUTIVE
OFFICERS OF REGISTRANT
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name               | Age | Position
|------------------ | --- | --------
|Thomas W. Haley    |     | 65      
|William P. Murnane |     | 39      
|Thomas Paulson     |     | 45      
|Allan J. Chan      |     | 51      
|Brian R. Dahmes    |     | 41      
|Douglas W. Keller  |     | 43      
|Srinivas Kuchipudi |     | 33      
|Kelly S. Schuller  |     | 36      

|Mr.
Haley served as President of the Company from 1972 to 1988 and Chief Executive
Officer from 1988 through 1999. He has been a Director and Chairman of the
Company since its inception in 1972.


Mr.
Murnane was promoted to President and Chief Operating Officer in July 1998 and to Chief
Executive Officer in January 2000. Mr. Murnane joined the Company in July 1995 as Vice
President. From June 1993 to June 1995, Mr. Murnane was Chief Operating Officer of
Boutwell, Owens & Co., a private manufacturer of packaging, in Fitchburg, Massachusetts.
From June 1992 to June 1993, Mr. Murnane was Director of Operations for Uniform Printing & Supply,
Inc. in Acton, Massachusetts. Prior to that, he held various operating and corporate
planning positions during a ten-year career at United Parcel Service.



Mr.
Paulson joined the Company in February 2001 as Chief Financial Officer. Prior to Innovex,
Mr. Paulson spent 19 years at The Pillsbury Company (TPC) where he held a variety of
executive positions managing complex financial and business issues in multi-operational
and multinational divisions including Vice President of Finance.


Mr.
Chan joined the Company in June 1988 as Director of Sales and Marketing for the Precision
Products Division. In October 1990, Mr. Chan was promoted to Vice President of Sales and
Marketing of the Precision Products Division. In 1991, his responsibilities were expanded
to include manufacturing. In May 1995, he was promoted to Vice President and General
Manager of Precision Products Division. In July of 1998, he was promoted to Senior Vice
President , Sales and Marketing. Prior to joining Innovex, Mr. Chan was the Director of
Sales and Marketing for Braemar Computer Corporation a division of Carlysle Corporation.
In August 2001, Mr. Chan was named General Manager of Consumer Electronics Division.


Mr.
Dahmes joined the Company in July 1997 as Plant Manager. Mr. Dahmes was promoted to
Director of Manufacturing in July 1998 and to Vice President, Quality in March of 1999.
In November 1999, he was promoted to Vice President, Managing Director Innovex
(Thailand). In August 2001, Mr. Dahmes was named Vice President of Research and
Development. From 1992 to 1995, Mr. Dahmes served as Process Engineering Manager for
Sheldahl Interconnect, and from 1995 to 1997, he was an Engineering Manager with Sheldahl
Microproducts.


11
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Mr.
Keller joined the Company in January 1990 as Corporate Controller. In May 1992, Mr.
Keller was made an officer of the corporation and in October 1996, he was promoted to
Vice President, Finance. From July 1988 to January 1990, Mr. Keller was Manager of
Financial Accounting and Tax for UFE, Inc., a manufacturer of injection molded plastic
components. From 1983 to 1988, Mr. Keller was a Senior Auditor for the Pillsbury Company.
From 1980 to 1983, he was a Senior Accountant with Deloitte Haskins & Sells, a CPA firm.



Mr.
Kuchipudi joined the Company in September 1999 as Vice President, Operations. From July
1996 to August 1999, Mr. Kuchipudi was a management consultant for Pittiglio Rabin Todd & McGrath.
Prior to that, he held various engineering and marketing positions during a five-year
career at Motorola, Inc.




Mr.
Schuller joined the Company in April 2001 as Vice President, Strategic Marketing and New
Business Development. Prior to joining Innovex, Mr. Schuller spent five years at McKinsey
& Company where he led a number of major strategy and business development engagements for
Fortune 500 companies. Before McKinsey, he worked for The Pillsbury Company in Strategic
and Financial Planning as well as Ernst & Young as a certified public accountant. In
August 2001, Mr. Schuller was named General Manager of New Ventures Division.
12
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II


ITEM 5. MARKET FOR
REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER               MATTERS


Common Stock
Information


The
Companys common stock is traded in the over-the-counter market under the
symbol INVX. The table below sets forth the high and low closing
sale prices as reported by NASDAQ. As of November 16, 2001, the Company had 685
shareholders of record. The Company has not paid a dividend since November 1999.
The Companys intention is to continue this policy.


Price Range of
Common Stock
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               | 2001 | 2000   
|-------------- | ---- | -------
|
|First Quarter  |      | $16.438
|Second Quarter |      | 11.563 
|Third Quarter  |      | 5.150  
|Fourth Quarter |      | 4.270  

|ITEM 6. SELECTED
FINANCIAL DATA


The
following selected consolidated financial data has been derived from the
consolidated financial statements of the Company for each of the years in the
five-year period ended September 30, 2001. The following information should be
read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated
financial statements of the Company and related notes thereto included elsewhere
in this report.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Years Ended September 30,    | 2001 | 2000         | 1999 | 1998         | 1997
|---------------------------- | ---- | ------------ | ---- | ------------ | ----
|Net sales                    |      | $145,635,446 |      | $164,461,510 |     
|Net income (loss)            |      | (28,875,680  | )    | (11,054,410  | )   
|Net income (loss) per share: |     
|Basic                        |      | ($1.93       | )    | ($0.75       | )   
|Diluted                      |      | ($1.93       | )    | ($0.75       | )   
|Cash dividends per share     |      | $0.00        |      | $0.04        |     
|Total assets                 |      | 142,666,541  |      | 167,679,892  |     
|Long-term debt, less current |     
|maturities                   |      | 26,403,021   |      | 21,003,284   |     
|Stockholders equity         |      | 68,174,772   |      | 96,396,047   |     

|ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION               AND
RESULTS OF OPERATIONS


Earnings
Summary


The
Company reported a net loss of ($28,876,000) or ($1.93) basic and diluted net
loss per share for the fiscal year ended September 30, 2001. This compares to
net loss of $(11,054,000) or ($0.75) basic and diluted net loss per share in
fiscal 2000 and net income of $6,559,000, $0.44 basic and diluted net income per
share in 1999. Fiscal 2001 results decreased as compared to fiscal 2000
primarily due to charges to restructure the Companys manufacturing
operations by closing the Companys manufacturing facility in Chandler,
Arizona and moving those operations to Minnesota and Thailand. In addition, a
portion of the decrease was due to lower revenue generated by standard flexible
circuit product lines associated with the ADFlex Solutions acquisition in late
1999. The Company took a number of steps during fiscal 2001 to reduce its fixed
costs including closing the high cost Chandler facility and reducing the world
wide work force. As a result of these cost reduction measures and expected
increase in revenue, the Company expects significantly improved operating
results in fiscal 2002.


13
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Fiscal
2000 results decreased as compared to fiscal 1999 primarily due to charges to
restructure the Companys manufacturing operations by moving operations
from Mexico to Thailand and closing the Mexican facility. The decrease is also
due to operating losses generated by the acquired ADFlex operation and increased
interest expense as a result of the ADFlex acquisition. Revenue related to the
acquired ADFlex operation decreased throughout fiscal 2000 as a result of
pre-acquisition customer service and quality issues and the operations
relatively high cost structure. Innovex took several steps to reduce costs
during fiscal 2000. The higher cost Mexican facility was closed with operations
being transferred to the expanded lower cost Lamphun Thailand facility and the
manufacturing, customer service and quality areas were strengthened.


Results of
Operations


Net
Sales  The Companys net sales of $145,635,000 for fiscal 2001
decreased 11% from fiscal 2000 net sales of $164,462,000. The decrease in 2001
from 2000 was due to lower revenue generated by standard flexible circuit
product lines associated with the ADFlex Solutions acquisition in late 1999.
Revenue generated by the acquired ADFlex Solutions operation declined in early
fiscal 2001 and throughout fiscal 2000 as a result of quality, cost and customer
service issues existing at the time of purchase. In addition, revenue from the
acquired consumer and telecommunication product lines was significantly impacted
by the current economic downturn during the second, third and fourth quarters of
fiscal 2001. The quality, cost and customer service issues have been addressed
and revenue from the acquired product lines has stabilized. Revenue from the
core high-end flexible circuits continues to increase. Revenue is expected to
show modest sequential increases throughout fiscal 2002.


Net
sales for fiscal 2000 were $164,462,000, a 59% increase from 1999 net sales of
$103,198,000. The increase in 2000 over 1999 was due, in part, to the increase
in flexible circuit revenue from the disk drive industry. In addition, a large
portion of the increase was due to revenue generated from the telecommunication,
network systems, consumer and other industries related to the August 1999
acquisition of ADFlex. These increases offset a reduction in revenue generated
from lead wire interconnects as the disk drive industry transitioned to
integrated interconnects including the Companys Head Interconnect Flex
(HIF) and Flex Suspension Assembly (FSA). Less than 1% of revenue for fiscal
2000 was generated by lead wire assemblies as compared to 26% for fiscal 1999.


Revenue
from the disk drive industry generated 68% of fiscal 2001 revenue and is
expected to be higher during fiscal 2002 due to FSA revenue increasing at a
faster pace than increases in revenue from other industries. In addition, during
fiscal 2001, 13% of the revenue was generated from network system applications,
10% from consumer applications and 9% from applications from other industries.
The acquisition of ADFlex has reduced the Companys dependence on the disk
drive industry significantly from its historical levels of 85-90% of revenue.
Fiscal 2002 should benefit from continued growth in the demand for high
technology flexible circuit products including the Companys FSA and Flex
Gimbal Suspension Assembly (FgSA) and an expected economic improvement in the
later part of the year. Significant progress has been made in gaining customer
acceptance of the Companys FSA product and the introduction of the next
generation FgSA product will be integral to increasing revenue in future years.


Export
sales accounted for 80% of the Companys revenue in fiscal 2001 as compared
to 73% for 2000 and 74% for 1999, reflecting the high level of interconnect
shipments to electronic manufacturers in Asia. A significant portion of the
remaining domestic sales are subsequently shipped internationally by the
Companys customers.


Gross
Margin  The Companys gross margin as a percent of sales for fiscal
2001 decreased to 11.4%, from the 15.0% reported for fiscal 2000. The decrease
was primarily due to reduced fixed cost leverage resulting from lower revenue
levels of the standard flexible circuits and duplicate costs related to the
transfer of manufacturing operations from Chandler, Arizona to the
Companys Minnesota facility. Gross margins in fiscal 2002 are expected to
improve due to a lower fixed cost basis as a result of the cost reduction
measures taken by the Company in fiscal 2001. These cost reduction measures
include the transfer of manufacturing
operations from Arizona to the Minnesota and Thailand facilities and a reduction
of the Companys workforce. The Company also expects increased gross margin
leverage from this reduced cost structure as revenue increases are realized.



14
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Companys gross margin decreased to 15.0% of sales in fiscal 2000 as
compared to 26.1% for fiscal 1999. The decrease was primarily due to fiscal 2000
including lower margin revenue related to the acquired ADFlex operation. The
acquisition related revenue generates a lower gross margin percent than the
high-end Innovex flexible circuit revenue due to the higher material content of
the assembly portion of the business and lower level of technical tolerances
required. Gross margins for the acquired ADFlex operation are also lower due the
level of fixed costs related to the operation.


Operating
Expenses  Selling, general and administrative expenses were 12.7% of net
sales in 2001 as compared to 9.8% in 2000 and 9.5% in 1999. A portion of the
increase in selling, general and administrative expenses in fiscal 2001 over
2000 is the result of increased spending due to hiring, relocation and duplicate
personnel costs related to the Chandler to Minnesota move and due to lower
revenues as a result of the current economic slowdown. The increase in operating
expenses as a percent of sales for 2000 as compared to 1999 is the result of the
amortization of intangibles related to the ADFlex and Boron acquisitions. Fiscal
2002 operating expenses should decrease as a percent of sales as a result of
cost savings measures taken in fiscal 2001 and by the expected increase in
fiscal 2002 revenue.


Engineering
expense decreased to 4.4% of net sales in fiscal 2001 from 4.7% in 2000 and 4.4%
in 1999. The decrease in engineering expenses as a percent of sales for fiscal
2001 is a result of reduced spending due to the completion of the effort to
develop a materials manufacturing process. Engineering spending increased in
fiscal 2000 as compared to 1999 due to spending related to the development of
base material manufacturing process in the new Maple Plain Minnesota facility.
The fiscal 2001 and 2000 spending was concentrated on FSA development and the
development of a process to manufacture material for use in producing double
sided, plated through-hole flexible circuits. Fiscal 2002 engineering spending
is expected to concentrate on manufacturing process improvements, further FSA
and FgSA technology improvements, semiconductor packaging substrates and other
high-end flexible circuit technology development related to new products.


Restructuring
Charges  The fiscal 2001 second quarter includes asset impairment and
restructuring charges of $9,754,000 and $10,124,000 related to the restructuring
of the Companys manufacturing operations. The restructuring is primarily
related to closing the Companys Chandler, Arizona facility and moving
manufacturing operations to the Companys Minnesota and Thailand locations.
The charges were recorded pursuant to a plan announced in January 2001. The
charge included approximately $6,380,000 related to asset impairment of property
and equipment and $3,374,000 for the impairment of the remaining unamortized
balance of the goodwill recorded at the time of the Companys September
1999 acquisition of ADFlex Solutions, Inc. The charge also includes $1,636,000
of inventory written off related to discontinued product lines and accrued
liabilities of $2,156,000 for employee severance and benefits and $6,332,000 for
facility abandonment costs.The restructuring is expected to be substantially
complete by the end of the second quarter of fiscal year 2002 with the exception
of the costs accrued to maintain the leased Chandler facility through the June
2003 lease termination.


The
fiscal 2000 first quarter includes a $13,785,085 restructuring charge related to
restructuring the Companys manufacturing operations. The restructuring is
primarily related to closing the Companys Agua Prieta, Mexico facility and
moving operations to its facility in Lamphun, Thailand. The charge included
approximately $6,605,000 related to asset impairment of property and equipment,
$356,000 for the write off of inventory and supplies, $176,000 for increasing
the accounts receivable reserve, and accrued liabilities of $2,101,000 for
facility abandonment costs and $4,547,000 in employee severance and benefits. A
change in estimate was recorded in the quarter ending September 2000 increasing
the facility abandonment accrual by $1,435,000 and decreasing the accrued
employee severance by $1,485,000. The estimate changes were due to higher costs
than expected to discontinue the operation of the Mexican facility and higher
turnover than expected prior to the payment of severance. The restructuring was
substantially complete as of September 2000 with the exception of completing the
disposition of the Mexican facility. During
the quarter ending March 31, 2001, the Company had a $495,000 increase in the
estimate of the facility abandonment charges relating to the length of time
required to complete the disposition of the facility located in Agua Prieta,
Mexico.


15
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Interest
Income (Expense)  Interest income decreased to $127,000 in fiscal 2001
from $524,000 and $2,035,000 in fiscal 2000 and 1999 respectively. The decreases
in fiscal 2001 and 2000 correspond to the reduction in the Companys excess
cash. Interest expense increased to $3,550,000 in 2001, from $3,193,000 in 2000
and $467,000 in 1999. Interest expense increased in fiscal 2001 related to the
new $27 million credit facility put in place in Thailand during fiscal 2001. The
fiscal 2000 increase in interest expense was due to interest on the credit
facility put in place related to the ADFlex acquisition.


Other
Income (Expense)  Net other expense in fiscal 2001 of $266,000 was
primarily due to increased foreign currency transaction costs as a result of the
high level of revenue recorded in Thailand baht and foreign currency translation
losses related to the volatility of the Thailand baht/US dollar relationship
during the year. Net other expense for fiscal 1999 included a $630,000 charge
related to the settlement of threatened litigation by a former director of the
Company.


Income
(Loss) Before Provision For Income Taxes  Income (loss) before provision
for income taxes was ($32,349,000) for fiscal 2001 as compared to ($15,570,000)
and 9,239,000 for 2000 and 1999 respectively. As a percent of net sales, income
before provision for income taxes was (22.2%) for 2001 as compared to (9.5%) for
2000 and 9.0% for 1999.


Liquidity and
Capital Resources


Cash
and equivalents increased by $125,000 to $1,798,000 at September 30, 2001. Net
cash provided by operating activities increased in 2001 to $1,412,000 from
$766,000 in 2000 and $26,215,000 in 1999. The increase in cash and equivalents
as well as net cash provided by operating activities during fiscal 2001 as
compared to 2000 was primarily due to the reduction in accounts receivable and
inventories more than offsetting the reduction in accounts payable. The
reduction from 1999 to fiscal 2000 was primarily due to temporary increases in
inventory as a result of the move from Mexico to Thailand, operating losses
generated by the acquired ADFlex operation and increased interest expense. The
Company invested approximately $12 million, $24 million and $23 million in
captial expenditures in fiscal 2001, 2000 and 1999. The fiscal 2001 expenditures
were primarily related to additional FSA attachment equipment and the Minnesota
and Thailand facility additions related to the move of operations from Arizona
to Minnesota and Thailand. The capital expenditures in both fiscal 2000 and 1999
include additional equipment to increase the capacity of the automated flexible
circuit production facility in Litchfield, Minnesota and the costs to construct
and equip a material manufacturing facility. In addition, fiscal 2000 included
capital expenditures to increase the capacity of the Lamphun Thailand facility
as part of the manufacturing restructuring plan to close the Mexican facility
and move the operation to Thailand. The Company also acquired the assets and
operations of its Thailand subcontractor in October 1999 for $3,750,000.


On
April 23, 2001 the Company entered into a 1.2 billion Thailand baht
(approximately $27 million) credit facility agreement with Bank of Ayudhya
Public Company Limited and The Industrial Finance Corporation of Thailand. The
facility is comprised of a 590 million baht long-term facility, a 530 million
baht packing credit facility, a 70 million baht short term working capital
facility and a 10 million baht overdraft facility. The new Thailand based
facility is secured by certain receivables, inventory and assets held by the
Company in Thailand.


Working
capital decreased to ($5,883,000) at September 30, 2001 from $6,297,000 at
September 30, 2000. The Companys current ratio was .9 at fiscal 2001
year-end, compared to 1.1 at the end of fiscal 2000. The decrease is primarily
due to the reduced level of receivables and inventories and the increases in
current maturities of long term debt.


Net
property, plant and equipment decreased by $7.8 million to $86,739,000 at
September 30, 2001. The decrease was due to the disposal of capital equipment
related to the closing of the Arizona manufacturing facility. Intangible assets
decreased by $4.0 million to $3.0 million at September 30, 2001 primarily as a
result of the write-off of goodwill related to the 1999 ADFlex acquisition.


16
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Long-term
debt, net of current maturities, increased by $5.4 million. The increase is the
result of the $6.2 million payments made on the existing Wells Fargo facility
being offset by the new $10.7 million long term portion of the Thailand baht
credit facility. The ratio of long-term debt, net of current maturities, to
stockholders equity was .39 at September 30, 2001 compared to .22 at the
end of fiscal 2000.


The
Company has not utilized the Thailand based receivables from its largest
customer as security for the existing credit facilities. Therefore, the Company
will continue to pursue additional financing opportunities in Thailand to be
secured by these receivables. In addition, the Company is also pursuing other US
based financing alternatives. Management believes that the new Thailand credit
facility, the existing US credit facility, potential new Thailand based
borrowings, cash, investments and cash generated from operations will provide an
adequate source of funds to support projected working capital needs and capital
expenditures. The covenants under the Companys U.S. credit facility were
waived at September 30, 2001. The Company has reduced its cost structure during
the past year as evidenced by the restructuring of its manufacturing operation
including the closing of its Chandler manufacturing facility. The Company will
continue to pursue other means of cost reduction to improve its long-term cash
flow.


Forward-Looking
Information


Statements
included in this Managements Discussion and Analysis of Financial
Condition and Results of Operations, elsewhere in this report and in future
filings by the Company with the SEC, except for the historical information
contained herein and therein, are forward-looking statements that
involve risks and uncertainties. These risks and uncertainties include the
timely availability and acceptance of new products including the FgSA and
semiconductor packaging substrates, the impact of competitive products and
pricing, the transfer of Chandler AZ operations to Minnesota, interruptions in
the operations of the Companys single source suppliers, changes in
manufacturing efficiencies and other risks detailed from time to time in the
Companys reports filed with the Securities and Exchange Commission. In
addition, a significant portion of the Companys revenue is generated from
the disk drive, consumer electronics, computer and data storage industries and
the global economic downturn has had and a continued economic downturn will
continue to have an adverse impact on the Companys operations. The Company
disclaims any obligation subsequently to revise any forward-looking statements
to reflect subsequent events or circumstances or the occurrence of unanticipated
events.


ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The
Companys earnings and cash flows are subject to fluctuations due to
changes in foreign currency exchange rates. While the Company transacts business
predominately in U.S. Dollars a portion of its sales and expenses are
denominated in foreign currencies. Changes in the relation of foreign currencies
to the U.S. Dollar will affect the Companys cost of goods sold and
operating margins and could result in exchange gains or losses. To reduce the
impact of certain foreign currency fluctuations, the Company enters into
short-term forward foreign currency exchange contracts (hedges) in the regular
course of business to manage its risk exposure, not as speculative instruments.
Typically, these contracts have maturities of 3 months or less. The forward
exchange contracts generally require the Company to exchange Thailand Baht for
U.S. Dollars or U.S Dollars for Thailand Baht at maturity, at rates agreed to at
inception of the contracts. The gains or losses on hedges of transaction
exposure are included in income in the period in which the exchange rates
change. The gains and losses on unhedged foreign currency transactions are
included in income.


The
Company periodically reviews the outlook for expected currency exchange rate
movements as well as the policy on desired future foreign currency cash flow
positions (long, short, balanced) for those currencies in which the Company has
significant activity. Expected future cash flow positions and strategies are
continuously monitored. At September 30, 2001, the Company had one open forward
exchange contract to buy a total of 425,000,000 Thai baht. No assurance can be
given that the Companys hedging strategies will prevent future currency
fluctuations from adversely affecting the Companys business, financial
condition, results of operations and cash flows.


17
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO FINANCIAL DATA
|-----------------------------------------------------------------------------

|                                                                                | Page
|------------------------------------------------------------------------------- | ----
|Report of Independent Certified Public Accountants                              |     
|                                                                                |     
|Consolidated Balance Sheets at September 30, 2001 and 2000                      |     
|                                                                                |     
|Consolidated Statements of Operations for each of the three years in the period |     
|ended September 30, 2001                                                        |     
|                                                                                |     
|Consolidated Statements of Stockholders Equity for each of the three years     |     
|in the period ended September 30, 2001                                          |     
|                                                                                |     
|Consolidated Statements of Cash Flows for each of the three years in the        |     
|period ended September 30, 2001                                                 |     
|                                                                                |     
|Notes to Consolidated Financial Statements                                      |     
|                                                                                |     
|Quarterly Financial Data (unaudited)                                            |     

|18
|--

|Report of Independent
Certified Public Accountants


Board of DirectorsInnovex, Inc.


We
have audited the accompanying consolidated balance sheets of Innovex, Inc. and
Subsidiaries as of September 30, 2001 and 2000, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of
the three years in the period ended September 30, 2001. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.


We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.


In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Innovex, Inc. and
Subsidiaries as of September 30, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.


We
have also audited Schedule II of Innovex, Inc. and Subsidiaries to Form 10-K for
each of the three years in the period ended September 30, 2001. In our opinion,
this schedule presents fairly, in all material respects, the information
required to be set forth therein.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | \s\ GRANT THORNTON LLP
| | ----------------------

| | Grant Thornton LLP
| | ------------------

|Minneapolis, MinnesotaNovember 1,
2001
19
|-----------------------------------------

|INNOVEX, INC. AND
SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
|---------------------------------------------------------

|                                                             | September 30,
|------------------------------------------------------------ | -------------
|
|ASSETS                                                       |              
|Current assets:                                              |              
|Cash and equivalents                                         |              
|Accounts receivable, less allowance for doubtful accounts of |              
|$670,000 (2000--$668,000)                                    |              
|Inventories                                                  |              
|Income taxes receivable                                      |              
|Other current assets                                         |              
|                                                             |              
|Total current assets                                         |              
|Property, plant and equipment  at cost:                     |              
|Land and land improvements                                   |              
|Buildings and leasehold improvements                         |              
|Machinery and equipment                                      |              
|Office furniture and fixtures                                |              
|                                                             |              
|                                                             |              
|Less accumulated depreciation and amortization               |              
|                                                             |              
|Net property, plant and equipment                            |              
|Intangible assets, net of accumulated                        |              
|amortization of $1,316,000 (2000--$1,326,000)                |              
|Deferred income taxes                                        |              
|Other assets                                                 |              
|                                                             |              
|                                                             |              
|                                                             |              
|LIABILITIES AND STOCKHOLDERS EQUITY                         |              
|Current liabilities:                                         |              
|Current maturities of long-term debt                         |              
|Line of credit                                               |              
|Accounts payable                                             |              
|Accrued compensation                                         |              
|Other accrued liabilities                                    |              
|                                                             |              
|Total current liabilities                                    |              
|Other long-term liabilities                                  |              
|Long-term debt, less current maturities                      |              
|Commitments and contingencies                                |              
|                                                             |              
|Stockholders equity:                                        |              
|Common stock, $.04 par value; 30,000,000 shares authorized,  |              
|15,044,249 shares issued and outstanding (2000--14,930,286)  |              
|Capital in excess of par value                               |              
|Retained earnings                                            |              
|                                                             |              
|Total stockholders equity                                   |              
|                                                             |              
|                                                             |              
|                                                             |              

|The accompanying notes
are an integral part of these statements.


20
|---------------------------------------------------------------------

|INNOVEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|--------------------------------------------------------------------

|                                                 | For the years ended September 30,
|------------------------------------------------ | ---------------------------------
|
|Net sales                                        |                                  
|Costs and expenses:                              |                                  
|Cost of sales                                    |                                  
|Selling, general and administrative              |                                  
|Engineering                                      |                                  
|Restructuring charges                            |                                  
|Interest expense                                 |                                  
|Interest income                                  |                                  
|Other (income) expense                           |                                  
|                                                 |                                  
|                                                 |                                  
|                                                 |                                  
|Income (loss) before provision for income taxes  |                                  
|Benefit (provision) for income taxes             |                                  
|                                                 |                                  
|Net income (loss)                                |                                  
|                                                 |                                  
|Net income (loss) per share:                     |                                  
|Basic                                            |                                  
|                                                 |                                  
|Diluted                                          |                                  
|                                                 |                                  
|Common and common equivalent shares Outstanding: |                                  
|Basic                                            |                                  
|                                                 |                                  
|Diluted                                          |                                  
|                                                 |                                  

|The accompanying notes
are an integral part of these statements.


21
|---------------------------------------------------------------------

|INNOVEX, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|------------------------------------------------------------------------------

|For the years ended September 30, 2001, 2000 and 1999 | CommonStock | Capital inExcess ofPar Value | RetainedEarnings | TotalStockholdersEquity
|----------------------------------------------------- | ----------- | ---------------------------- | ---------------- | ------------------------
|Balance at October 1, 1998                            |             | $591,184                     |                  | $15,732,350             
|Shares issued through exercise of stock               |            
|options                                               |             | 1,700                        |                  | 373,451                 
|Tax benefits derived from exercise of stock           |            
|options                                               |             |                              |                  | 75,929                  
|Dividends paid ($0.155 per share)                     |             |                              |                  |                         
|Net income                                            |             |                              |                  |                         
|                                                      |             |                              |                  |                         
|Balance at September 30, 1999                         |             | 592,884                      |                  | 16,181,730              
|Shares issued through exercise of stock               |            
|options                                               |             | 3,902                        |                  | 639,243                 
|Tax benefits derived from exercise of stock           |            
|options                                               |             |                              |                  | 179,058                 
|Shares issued through employee stock                  |            
|purchase plan                                         |             | 425                          |                  | 86,578                  
|Dividends paid ($0.155 per share)                     |             |                              |                  |                         
|Net loss                                              |             |                              |                  |                         
|                                                      |             |                              |                  |                         
|Balance at September 30, 2000                         |             | 597,211                      |                  | 17,086,609              
|Shares issued through exercise of stock               |            
|options                                               |             | 2,358                        |                  | 260,472                 
|Tax benefits derived from exercise of stock           |            
|options                                               |             |                              |                  | 142,983                 
|Shares issued through employee stock                  |            
|purchase plan                                         |             | 2,201                        |                  | 246,391                 
|Net loss                                              |             |                              |                  |                         
|                                                      |             |                              |                  |                         
|Balance at September 30, 2001                         |             | $601,770                     |                  | $17,736,455             
|                                                      |             |                              |                  |                         

|The accompanying notes
are an integral part of these statements.


22
|---------------------------------------------------------------------

|INNOVEX, INC. AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF CASH FLOWS
|-------------------------------------------------------------------

|                                                       | For the years ended September 30,
|------------------------------------------------------ | ---------------------------------
|
|Cash Flows From Operating Activities:                  |                                  
|Net income (loss)                                      |                                  
|Adjustments to reconcile net income (loss) to net cash |                                  
|provided by operating activities:                      |                                  
|Depreciation and amortization                          |                                  
|Deferred income taxes                                  |                                  
|Restructuring charges                                  |                                  
|Other non-cash items                                   |                                  
|Changes in operating assets and liabilities, net of    |                                  
|business acquisition:                                  |                                  
|Accounts receivable                                    |                                  
|Inventories                                            |                                  
|Other current assets                                   |                                  
|Accounts payable                                       |                                  
|Other current and long-term liabilities                |                                  
|Income taxes                                           |                                  
|                                                       |                                  
|Net cash provided by operating activities              |                                  
|Cash Flows From Investing Activities:                  |                                  
|Capital expenditures                                   |                                  
|Business acquisition                                   |                                  
|Proceeds from sale of assets                           |                                  
|Purchase of held-to-maturity securities                |                                  
|Sales and maturities of held-to-maturity securities    |                                  
|Other                                                  |                                  
|                                                       |                                  
|Net cash used in investing activities                  |                                  
|Cash Flows From Financing Activities:                  |                                  
|Principal payments on long-term debt                   |                                  
|Payment of bank debt acquired in business acquisition  |                                  
|Net proceeds on line of credit                         |                                  
|Issuance of long-term debt                             |                                  
|Proceeds from exercise of stock options                |                                  
|Proceeds from employee stock purchase plan             |                                  
|Dividends paid                                         |                                  
|                                                       |                                  
|Net cash provided by (used in) financing activities    |                                  
|                                                       |                                  
|Increase (decrease) in cash and equivalents            |                                  
|Cash and equivalents at beginning of year              |                                  
|                                                       |                                  
|Cash and equivalents at end of year                    |                                  
|                                                       |                                  

|Supplemental Disclosures:


Cash paid for interest was approximately
$3,508,000; $2,743,000 and $895,000 in 2001, 2000 and 1999.


Income tax payments were
approximately $86,000; $0 and $2,181,000 in 2001, 2000 and 1999.


Tax benefits derived from
exercise of stock options totaling approximately $143,000; $179,000 and $76,000
in 2001, 2000 and 1999 were recorded as a reduction of current income taxes
payable and an increase in capital in excess of par value.


The accompanying notes
are an integral part of these statements.


23
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|INNOVEX, INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS


September 30, 2001,
2000 and 1999



Note A 
Summary of Significant Accounting Policies


The
Company is a diversified manufacturer of electrical components for the computer,
data storage, consumer, medical, telecommunications and other electronic
industries. Substantially all of the Companys revenues, operating profits
and assets relate to one operating unit involved in the manufacture of flexible
circuit interconnects. Company customers are located throughout the United
States, Europe and the Pacific Rim. The Company has manufacturing facilities in
Litchfield and Maple Plain, Minnesota and Thailand.


A
summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:


Principles
of Consolidation and Fiscal Year  The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.


The
Company utilizes a fiscal year that ends on the Saturday nearest to September
30. For clarity of presentation, the Company has described all periods as if the
year ended September 30. The fiscal years ended September 30, 2001, 2000 and
1999 all include fifty-two weeks of operations.


Foreign
Currency Translation  The Company uses the United States dollar as its
functional currency for its subsidiaries in Mexico and Thailand. Re-measurement
gains and losses, resulting from the process of re-measuring the financial
statements of these foreign subsidiaries into U.S. Dollars, are included in
operations.


Foreign
Exchange Instruments  The Company enters into short-term forward foreign
currency exchange contracts in the regular course of business to manage its
exposure against foreign currency fluctuations, primarily relating to
nonfunctional currency monetary assets and liabilities. The forward exchange
contracts generally require the Company to exchange Thailand baht for U.S.
dollars or U.S. dollars for Thailand baht at maturity, at rates agreed to at the
inception of the contracts. The gains or losses on hedges of transaction
exposure are included in other income (expense) in the period in which the
exchange rates change. The gains and losses on unhedged foreign currency
transactions are included in other income (expense). The Company does not enter
into forward contracts for trading purposes.


Cash
Equivalents and Short-Term Investments  The Company considers all highly
liquid temporary investments with an original maturity of three months or less
to be cash equivalents. The Company had no cash equivalents at September 30,
2001 and 2000. Debt securities have been classified as held-to-maturity
securities, which are reported at amortized cost.


Accounts
Receivable  The Company grants credit to customers in the normal course of
business, but generally does not require collateral or any other security to
support amounts due. Management performs ongoing credit evaluations of
customers. The Company maintains allowances for potential credit losses.


Inventories
 Inventories are stated at the lower of cost or market, with cost
determined by the first-in, first-out method.


Property,
Plant and Equipment  Depreciation is provided using the straight-line
method over the estimated useful lives of the assets for financial reporting and
accelerated methods for tax purposes. Estimated service lives range from 5 to 30
years for buildings and leasehold improvements, from 2 to 7 years for machinery
and equipment and from 3 to 7 years for office furniture and fixtures.


Intangible
Assets  Intangible assets include goodwill, patents, licenses, technology
and trademarks, which are capitalized at cost and amortized on the straight-line
basis over their estimated useful lives. Useful lives range from 3 to 10 years.
Management reviews the valuation of goodwill on an ongoing basis. As part of this review,
management estimates the expected future cash flows to be generated by the
businesses acquired to determine whether an impairment of goodwill has occurred.


24
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)



Fair
values of Financial Instruments  Due to their short-term nature, the
carrying value of current financial assets and liabilities approximates their
fair values. The fair value of borrowings, if recalculated based on current
interest rates, would not significantly differ from the recorded amounts.


Net
Income (Loss) Per Share  The Companys basic net income (loss) per
share is computed by dividing net income (loss) by the weighted average number
of outstanding common shares. The Companys diluted net income (loss) per
share is computed by dividing net income (loss) by the weighted average number
of outstanding common shares and common share equivalents related to stock
options, when dilutive. Options to purchase 1,226,222, 631,543 and 193,650
shares of common stock with weighted average exercise purchase prices of $12.34,
$15.20 and $25.71 were outstanding during 2001, 2000 and 1999, but were excluded
from the computation of common share equivalents because they were antidilutive.


Revenue
Recognition  Sales are recorded at the time of shipment and provision for
anticipated returns, net of exchanges, is recorded based on historical
experience.


Use
of Estimates  Preparation of the Companys consolidated financial
statements requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities and related revenues and expenses.
Actual results could differ from these estimates.


Stock
Based Compensation  The Company utilizes the intrinsic value method of
accounting for its employee stock based compensation plans. Pro forma
information related to the fair value based method of accounting is contained in
Note E.


New
Pronouncements  In June 2001, the Financial Accounting standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. These
pronouncements, among other things, eliminate the pooling-of-interest method of
accounting for business combinations and require intangible assets acquired in
business combinations to be recorded separately from goodwill. The
pronouncements also eliminate the amortization of goodwill and other intangible
assets with indefinite lives and require negative goodwill be recognized as an
extraordinary gain effective for the Company beginning in September 2002.
Thereafter, goodwill and other intangible assets with indefinite lives will be
tested for impairment annually or whenever an impairment indicator arises.


In
September 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of long-lived Assets. SFAS 144 clarifies the accounting for disposals
of long-lived assets. This statement is effective for the Company beginning in
September 2002.


The
adoption of these requirements will require the Company to discontinue the
amortization of goodwill and any other intangible assets determined to have
indefinite useful lives.


Note B 
Business Acquisition


On
October 3, 1999, the Company purchased the assets of its Thailand subcontractor
for a total of $3,750,000. The purchase price included $757,000 allocated to
property, plant and equipment and $2,993,000 allocated to intangible assets.


On
August 9, 1999, the Company purchased 76% of the outstanding shares of common
stock of ADFlex Solutions, Inc.(ADFlex). The remaining 24% of the
shares outstanding were purchased on September 14, 1999. The $37.2 million
purchase price, included change in control payments of $1.9 million and
transaction costs of $.9 million. The purchase price was paid in the form of
cash. Pursuant to the purchase agreement, the Company was required to pay off
all outstanding balances under that certain Credit Agreement among ADFlex,
BankBoston N.A. and Bank Boston N.A. as Agent for Lenders, as amended (the
Credit Agreement). Innovex obtained a credit facility totaling in
principal amount $40 million, that was
utilized to refinance amounts owed under the Credit Agreement, pay down
ADFlexs current liabilities and pay related transaction costs. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations since acquisition are included in the accompanying financial
statements. The excess cost over the fair value of net assets acquired of $3.9
million was allocated to goodwill and was being amortized on a straight-line
basis over 10 years. The remaining goodwill was evaluated and considered
impaired in January 2001 and written off at that time as part of a restructuring
charge.


25
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)


The
following unaudited pro forma results of operations for the year ended September
30, 1999 assume the acquisition occurred on October 1, 1998. The pro forma
information includes adjustments for depreciation based on the fair market value
of the property, plant and equipment acquired, amortization of intangibles
arising from the transaction, the reduction of interest expense to reflect the
refinancing of the ADFlex credit facility, the reduction of interest income on
cash used to complete the acquisition, the elimination of salaries of ADFlex
executives terminated in conjunction with the merger and related changes in the
provision for income tax expense (in thousands of dollars except per share
amounts):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Year Ended1999                                
| |  | ----------------------------------------------
| |  | Net sales                                     
| |  | Net income (loss)                             
| |  | Basic and diluted net income (loss) per share:

|The
pro forma financial information is not necessarily indicative of the operating
results that would have occurred had the acquisition been consummated on the
assumed date, nor are they necessarily indicative of future operating results.


Note C 
Inventories


Inventories
are comprised of the following at September 30:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2001                               | 2000
| |  | ---------------------------------- | ----
| |  | Raw materials and purchased parts  |     
| |  | Work-in-process and finished goods |     
| |  |                                    |     
| |  |                                    |     
| |  |                                    |     

|Note D 
Line of Credit and Long-Term Debt


On
April 23, 2001 the Company entered into a 1.2 billion Thailand baht
(approximately $27 million) credit facility agreement with Bank of Ayudhya
Public Company Limited and The Industrial Finance Corporation of Thailand. The
facility is comprised of a 590 million baht term loan, a 530 million baht
packing credit facility, a 70 million baht short term working capital facility,
and a 10 million baht overdraft facility. Under the terms of the credit
facility, any outstanding balance on the term loan bears interest at 7.00%
annually until April 23, 2003, at which time the outstanding balance will bear
interest at the Thailand MLR rate. The term loan is serviced by quarterly
payments commencing September 28, 2001 and continuing through December 30, 2005.
Payments will be 22 million baht per quarter for the first year, 27 million baht
per quarter for the second year, 35 million baht per quarter for the third year,
40 million baht per quarter for the fourth year, and 47 million baht for the
remaining two quarterly payments. The packing credit, working capital and
overdraft facilities bear interest at the Thailand MOR market rate. The Thailand
based facility is secured by certain receivables, inventory and assets held by
the Company in Thailand. At September 30, 2001, 568 million baht or $12.8
million was outstanding under the term loan, 422 million baht or $9.5 million
was outstanding under the packing credit facility and there were no outstanding
balances under the working capital and overdraft facilities. The interest rate
for the term loan was 7.00% and the interest rates for the packing credit
facility were at rates from 5.00% to 5.25% at September 30, 2001.




26
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)


On September 15, 1999 the
Company entered into a credit facility to pay
off all outstanding balances existing at the time of the ADFlex acquisition as
required by the ADFlex merger agreement. As amended, the credit
facility consists of a $4.0 million revolving line of credit expiring September
30, 2002 and a $25.0 million, five-year term loan with equal principal payments
due each quarter commencing on October 1, 2000 and continuing through the
September 14, 2004 maturity date. Under the terms of the amended credit
facility, any outstanding balance on the revolving line of credit bears interest
at the prime interest rate plus 1.5% and the term facility bears interest at the
prime interest rate plus 1.5% or LIBOR plus 3.25%. The credit facility is
collateralized by all U.S. based accounts receivable, inventory, equipment, real
property and general intangibles of the Company. The Company is required to
maintain certain financial ratios and meet certain net worth and indebtedness
tests that were waived at September 30, 2001. At September 30, 2001, $18.75
million was outstanding under the term loan and $2.4 million was outstanding
under the revolving line of credit. At September 30, 2000, $25.0 million was
outstanding under the term loan and $9.2 million was outstanding under the
revolving line of credit. The interest rate for the term loan was 5.88% at
September 30, 2001 and the interest rate for the revolving line of credit was
7.5% at September 30, 2001.


Other
long-term debt consists of capitalized equipment leases. Net assets under
capital lease as of September 30, 2001 are approximately $5.4 million. Interest
rates on these leases range from 7.6% to 10.5%. Aggregate maturities of
long-term debt including capitalized leases for the next five years are as
follows (in thousands) : 2002  $9,467; 2003  $10,048; 2004 
$10,606; 2005  $4,691; 2006  $1,058. The recorded value of long-term
debt approximates fair market value.


Note E 
Stockholders Equity


Stock
Option Plans  The Company has stock option plans that provide for
incentive and non-qualified stock options to be granted to directors, officers
and other key employees or consultants. The stock options granted generally have
a ten-year life, vest over a period of six months to five years, and have an
exercise price equal to the fair market value of the stock on the date of grant.
At September 30, 2001, the Company had 243,320 shares of common stock available
for issue under the plans.


The
Company also has a restricted stock plan that provides for grants of common
stock to key employees of the Company other than the Chief Executive Officer and
the four highest paid executives of the Company other than the Chief Executive
Officer. The common stock grants generally vest over five years. At September
30, 2001, the Company had 103,000 shares of common stock available for issue
under the plan.


Transactions
under the plans during each of the three years in the period ending September
30, 2001 are summarized as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Number ofShares UnderOption    | WeightedAverageExercise Price
| |  | ------------------------------ | -----------------------------
| |  | Outstanding at October 1, 1998 |                              
| |  | Granted                        |                              
| |  | Forfeited                      |                              
| |  | Exercised                      |                              
| |  |                                |                              
| |  | Balance at September 30, 1999  |                              
| |  | Granted                        |                              
| |  | Forfeited                      |                              
| |  | Exercised                      |                              
| |  |                                |                              
| |  | Balance at September 30, 2000  |                              
| |  | Granted                        |                              
| |  | Forfeited                      |                              
| |  | Exercised                      |                              
| |  |                                |                              
| |  | Balance at September 30, 2001  |                              
| |  |                                |                              

|27
|--

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)


Options exercisable at
September 30:
|---------------------------------------------------------------------------------------------

| |  | NumberExercisable | WeightedAverageExercise Price
| |  | ----------------- | -----------------------------
| |  | 1999              |                              
| |  | 2000              |                              
| |  | 2001              |                              

|The
following table summarizes information concerning currently outstanding and
exercisable stock options:
|----------------------------------------------------------------------------------------------------------

|            |  | Options Outstanding |  | Options Exercisable
|----------- |  | ------------------- |  | -------------------
|
|$0.00$2.25 |  | 56,086              |  | 7.8 years          
|3.45  5.05 |  | 196,000             |  | 9.3 years          
|6.49  8.91 |  | 457,723             |  | 5.9 years          
|8.9211.50  |  | 460,100             |  | 5.9 years          
|11.5316.26 |  | 290,450             |  | 7.1 years          
|18.8832.44 |  | 116,000             |  | 5.3 years          
|            |  |                     |  |                    
|            |  | 1,576,359           |  |                    
|            |  |                     |  |                    

|The
Companys 2001, 2000 and 1999 pro forma net income (loss) and diluted net
income (loss) per share would have been ($29,868,000), ($11,927,000), and
$5,871,000 or ($2.06), ($0.82) and $0.39 had the fair value method been used for
valuing options granted during those years. The impact on net income (loss) may
differ in future disclosures because they do not take into effect pro forma
compensation expense related to grants made before 1996. The weighted average
value of options granted in 2001, 2000 and 1999 was $5.11, $4.26 and $4.68. The
value was computed by applying the following weighted average assumptions to the
Black Scholes options pricing model: volatility of 72%, 54% and 51%; dividend
yield of 0.0%, 0.0% and 1.2%; risk-free rate of return of 5.2%, 6.1% and 4.5%;
and an average term of 4.5 years for 2001 and 2000 and 3.5 years for 1999.


Employee
Stock Purchase Plan  The Company has an Employee Stock Purchase Plan
(ESPP) which is available to eligible employees. Under terms of the plan,
eligible employees may designate from 1% to 10% of their compensation to be
withheld through payroll deductions for the purchase of common stock at 85% of
the lower of the market price on the first or last day of the offering period.
Under the plan, 250,000 shares of common stock have been reserved for issuance.
As of September 30, 2001, 65,661 shares have been issued under the plan. Fair
value disclosures under SFAS No. 123 have not been disclosed for shares under
the ESPP as such values are immaterial.


28
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)


Note F 
Income Taxes


The
effective income tax rates differed from the federal statutory income tax rate
as follows for the years ended September 30:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 | 2001 | 2000  | 1999
|-------------------------------- | ---- | ----- | ----
|Federal statutory rate           |      | (34.0 | %)  
|State income taxes               |      | (0.5  | )   
|FSC benefit                      |      |      |     
|Tax exempt interest              |      |      |     
|Foreign operating income benefit |      |      |     
|Allowances                       |      | 20.1  |     
|Additional income tax accrual    |      |      |     
|Non-deductible intangibles       |      | 3.0   |     
|Other                            |      | .7    |     
|                                 |      |       |     
|                                 |      | (10.7 | %)  
|                                 |      |       |     

|Components
of the provision for income taxes are as follows for the years ended September
30 (thousands of dollars):
|--------------------------------------------------------------------------------------------------------------------

| |  | 2001     | 2000 | 1999   
| |  | -------- | ---- | -------
| |  | Current: |      |        
| |  | Federal  |      | ($1,647
| |  | State    |      | (216   
| |  |          |      |        
| |  |          |      | (1,863 
| |  | Deferred |      | (1,610 
| |  |          |      |        
| |  |          |      | ($3,473
| |  |          |      |        

|The
cumulative temporary differences between the tax bases of assets and liabilities
and their carrying amounts for financial statement purposes are as follows at
September 30 (thousands of dollars):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | 2001 | 2000       | 1999
|-------------------------------------------------- | ---- | ---------- | ----
|Current deferred tax assets:                       |      |            |     
|Inventories                                        |      | $      158 |     
|Receivables                                        |      | 53         |     
|Compensation and benefits                          |      | 334        |     
|Restructuring                                      |      | 1,316      |     
|NOL carryforwards                                  |      | 1,736      |     
|Other                                              |      | 221        |     
|                                                   |      |            |     
|                                                   |      | $   3,818  |     
|                                                   |      |            |     
|Long-term deferred tax assets (liabilities)  net: |     
|Accelerated depreciation                           |      | $(4,561    | )   
|Intangibles                                        |      | 7,021      |     
|Restructuring                                      |      | 126        |     
|Tax credit and NOL carryforwards                   |      | 26,280     |     
|Allowances                                         |      | (19,263    | )   
|                                                   |      |            |     
|                                                   |      | $   9,603  |     
|                                                   |      |            |     

|29
|--

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)


Note G  Retirement
and Profit-Sharing Plans


The
Company sponsors a 401K retirement plan for all of its employees meeting minimum
eligibility requirements. The plan provides Company matching contributions of
50% of the first 6% of employee contributions to the plan. An additional 401K
retirement plan was also in effect for the last 8 weeks of fiscal 1999 and the
first 13 weeks of fiscal 2000 relating to the ADFlex acquisition. This plan was
sponsored for all employees of the ADFlexs United States operation. Under
this plan, the Company made contributions each year up to a maximum of 4% of an
employees total compensation. The Company merged the ADFlex plan into the
Company plan on December 31, 1999. Company contributions for both these plans
were approximately $621,000, $547,000 and $385,000 for the years ended September
30, 2001, 2000 and 1999.


Note H 
Research and Development Costs


The
Company incurred research and development costs of approximately $4,518,000,
$3,472,000 and $2,878,000 for the years ended September 30, 2001, 2000 and 1999.


Note I 
Foreign Operations and Significant Customers


Prior
to the September 1999 ADFlex acquisition, the Company had no foreign-based
operations; however, the Company utilized subcontractors in Thailand and China
to perform certain labor intensive procedures on a large portion of its
products. As part of the ADFlex acquisition, the Company acquired an Asian
operation, located in Lamphun, Thailand. The Company will continue to increase
the functions performed at this location in order to take advantage of the
proximity to customers and favorable labor and operating costs. In addition, the
Company purchased the assets of its Thailand subcontractor, Boron Public Limited
Company in October 1999. The Company had aggregate export sales of $116,405,000,
$119,603,000 and $76,607,000 for the years ending September 30, 2001, 2000 and
1999, principally to Pacific Rim customers. With respect to foreign operations
for the years ended September 30, 2001 and 2000, long-lived assets of
$30,330,000 and $27,658,000 were located in Thailand and $2,855,000 and
$4,313,000 were located Mexico, respectively.


Revenues
from two customers made up a significant portion of the Companys total net
sales during the years ending September 30:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2001       | 2000 | 1999
| |  | ---------- | ---- | ----
| |  | Customer A |      | 54  
| |  | Customer B |      | 8   

|Accounts
receivable from the above two customers are 63% and 54% of the Companys
accounts receivable at September 30, 2001 and 2000.


Note J 
Commitments and Contingencies


The
Company leases facilities and equipment under operating leases that expire at
various dates through November 2007. As of September 30, 2001, the future
minimum lease commitments under the operating leases are payable as follows (in
thousands): 2002  $2,093; 2003  $1,868; 2004  $1,270; 2005
 $1,440; 2006  $1,142; 2007  $285.


The
nature of the Companys business exposes the Company to potential
environmental remediation liabilities arising from the manufacture, use and
disposal of hazardous materials used to manufacture flex interconnect products.
Management believes that any cost associated with maintaining the Companys
compliance with current environmental remediation laws will not have a material
adverse effect on the Companys financial statements.


Note K 
Derivative Instruments and Hedging


The
Company adopted SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities, and No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, on November 1, 2000. These Standards require entities to recognize
derivatives in their financial statements as either assets or liabilities measured at
fair value. The accounting for changes in the fair value of a derivative is recognized in
earnings unless certain criteria are met. These Standards also require formal
documentation, designation and effectiveness assessment of transactions receiving hedge
accounting. The Company formally documents all relations between hedging instruments and
the hedged items, as well as its risk-management objectives and strategy for undertaking
various hedge transactions. The Company assesses, both at the hedges inception and
on an ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in cash flows of the hedged items.



30
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)



The
Company enters into forward exchange contracts, to hedge foreign currency
denominated assets or liabilities, that are recorded at fair value with related
fair value hedge gains or losses recorded in earnings within the caption other
(income) expense. Generally, the Company purchases these contracts near the
beginning of each quarter while the expiration is near the end of each quarter.
The Company does not enter into forward exchange contracts for trading purposes.
At September 30, 2001, the Company had an open forward exchange contract to buy
Thailand Baht maturing October 4, 2001 with notional amounts totaling
425,000,000 Thailand Baht. At September 30, 2000, the Company had open forward
exchange sale contracts totaling 280,000,000 Thailand baht.


Note L 
Restructuring Charges


Manufacturing
operations restructuring  The fiscal 2001 second quarter includes asset
impairment and restructuring charges of $9,754,000 and $10,124,000 related to
the restructuring of the Companys manufacturing operations. The
restructuring is primarily related to moving manufacturing operations from the
Companys Chandler, Arizona facility to the Companys Minnesota
locations. The charges were recorded pursuant to a plan announced in January
2001. The charge included approximately $6,380,000 related to asset impairment
of property and equipment and $3,374,000 for the impairment of the remaining
unamortized balance of the goodwill recorded at the time of the Companys
September 1999 acquisition of ADFlex Solutions, Inc. The charge also includes
$1,636,000 of inventory written off related to discontinued product lines and
accrued liabilities of $2,156,000 for employee severance and benefits and
$6,332,000 for facility abandonment costs.The restructuring is expected to be
substantially complete by the end of the calendar year with the exception of the
costs accrued to maintain the leased Chandler facility through the June 2003
lease termination.


The
fiscal 2000 first quarter includes a $13,785,000 restructuring charge related to
restructuring the Companys manufacturing operations. The restructuring is
primarily related to closing the Companys Agua Prieta, Mexico facility and
moving operations to its facility in Lamphun, Thailand. The charge was recorded
pursuant to a plan announced in November 1999. The charge included approximately
$6,605,000 related to asset impairment of property and equipment, $356,000 for
the write off of inventory and supplies, $176,000 for increasing the accounts
receivable reserve, and accrued liabilities of $2,101,000 for facility
abandonment costs and $4,547,000 in employee severance and benefits. A change in
estimate was recorded in the quarter ending September 2000 increasing the
facility abandonment accrual by $1,435,000 and decreasing the accrued employee
severance by $1,485,000. The estimate changes were due to higher costs than
expected to discontinue the operation of the Mexican facility and higher
turnover than expected prior to the payment of severance. The restructuring was
substantially complete as of September 2000 with the exception of completing the
disposition of the Mexican facility. During the quarter ending March 31, 2001,
the Company had a $495,000 increase in the estimate of the facility abandonment
charges relating to the length of time required to complete the disposition of
the facility located in Agua Prieta, Mexico.


Lead
wire assembly product line disposition  During the fourth quarter of
fiscal 1999, the Company recorded a charge of approximately $2,765,000 related
to the discontinuation of the lead wire assembly product line. The charge
included approximately $871,000 related to asset impairment, $1,403,000 for the
write off of inventory and
supplies, $197,000 in employee severance, $156,000 in facility abandonment costs
and $138,000 to increase the accounts receivable reserve. The restructuring
charge was reduced by $134,000 in the third quarter of fiscal 2000 as a result
of a change in the estimated liability. The disposition was substantially
completed by June 30, 2000.


31
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)



Iconovex
Division disposition  The 1999 results also include a $1,695,000
restructuring charge associated with the disposition of the Iconovex Division
and its 51% owned joint venture, Smart Solution. This charge was recorded in
June 1999 when all operations were ceased and announced in July 1999. The charge
included $801,000 for prepaid expenses, $779,000 for intangible assets including
capitalized software, $14,000 in employee severance and $101,000 for
administrative costs. As of September 30, 1999, all amounts relating to this
restructuring were paid.


The
remaining restructuring accrual as of September 30, 2001 totaled $3,539,000.
Selected information regarding the restructuring follows (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      | Lead Wire Assembly ProductLine Disposition | Manufacturing OperationsRestructuring  Arizona | Manufacturing OperationsRestructuring  Mexico
|--------------------- | ------------------------------------------ | ----------------------------------------------- | ----------------------------------------------
|
|Accrual at October 1, |                                            |                                                 |                                               
|1999                  |                                            | $ 156                                           |                                               
|Establishment of      |                                           
|accrual               |                                            |                                                 |                                               
|Payments              |                                            | (3                                              | )                                             
|Change in estimate    |                                            | (153                                            | )                                             
|                      |                                            |                                                 |                                               
|Accrual at            |                                           
|September 30, 2000    |                                            |                                                |                                               
|Establishment of      |                                           
|accrual               |                                            |                                                |                                               
|Payments              |                                            |                                                |                                               
|Change in estimate    |                                            |                                                 |                                               
|                      |                                            |                                                 |                                               
|Accrual at            |                                           
|September 30, 2001    |                                            | $                                              |                                               
|                      |                                            |                                                 |                                               

Quarterly Financial Data(Unaudited)

|2001                | 1st Quarter | 2nd Quarter*  | 3rd Quarter | 4th Quarter   | Year
|------------------- | ----------- | ------------- | ----------- | ------------- | ----
|Net sales           |             | $ 38,576,884  |             | $ 34,936,271  |     
|Gross profit        |             | 6,026,704     |             | 3,097,789     |     
|Net loss            |             | (626,947      | )           | (23,266,023   | )   
|Net loss per share: |            
|Basic               |             | ($       0.04 | )           | ($       1.55 | )   
|Diluted             |             | ($       0.04 | )           | ($       1.55 | )   

---

|* |  | The second quarter includes restructuring charges of $20,372,939 related to the
restructuring of the Companys manufacturing operations.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|32
|--

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|------------------------------------------------------

|2000                  | 1st Quarter** | 2nd Quarter   | 3rd Quarter | 4th Quarter   | Year
|--------------------- | ------------- | ------------- | ----------- | ------------- | ----
|Net sales             |               | $ 44,724,625  |             | $ 41,388,132  |     
|Gross profit          |               | 4,715,176     |             | 4,646,758     |     
|Net income (loss)     |               | (11,169,262   | )           | (1,156,638    | )   
|Net income (loss) per |              
|share:                |              
|Basic                 |               | ($       0.75 | )           | ($       0.08 | )   
|Diluted               |               | ($       0.75 | )           | ($       0.08 | )   

---

|** |  | The first quarter includes restructuring charges of $13,785,000 related to the
restructuring of the Companys manufacturing operations.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING               AND FINANCIAL DISCLOSURE.



Not
applicable.

33
|----------------------------------------------------------------------------------------------------------------------------------

|PART III


ITEM 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT



Reference
is made to the section entitled Election of Directors in the
Registrants definitive proxy statement to be mailed to shareholders on or
about December 15, 2001, and filed with the Securities and Exchange Commission.
Information on executive officers is set forth in Part I, Item 4A hereto.


ITEM 11. EXECUTIVE
COMPENSATION



Reference
is made to the section entitled Executive Compensation and
Election of Directors in the Registrants definitive proxy
statement to be mailed to the Shareholders on or about December 15, 2001, and
filed with the Securities and Exchange Commission.


ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Reference
is made to the section entitled Security Ownership of Certain Beneficial
Owners and Management and Election of Directors in the
Registrants definitive proxy statement to be mailed to Shareholders on or
about December 15, 2001, and filed with the Securities and Exchange Commission.


ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS



Reference
is made to the section entitled Certain Transactions in the
Registrants definitive proxy statement to be mailed to Shareholders on or
about December 15, 2001, and filed with the Securities and Exchange Commission.


PART IV


ITEM 14. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K


(a) LIST OF DOCUMENTS
FILED AS PART OF THIS REPORT
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (1) |  | Financial
Statements Page(s)
| |  | --- |  | ----------------------------

| | The
following Consolidated Financial Statements of the Registrant, Innovex, Inc. and
subsidiaries, are included in Item 8:
| | --------------------------------------------------------------------------------------------------------------------------

| |  |  | Consolidated Balance Sheets at September 30, 2001 and 2000 | 20
| | - |  | ---------------------------------------------------------- | --

| |  |  | Consolidated Statements of Operations for each of the three years in the period
                ended September 30, 2001 | 21
| | - |  | ------------------------------------------------------------------------------------------------------------------------ | --

| |  |  | Consolidated Statements of Stockholders Equity for each of the three years in the
                period ended September 30, 2001 | 22
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------- | --

| |  |  | Consolidated Statements of Cash Flows for each of the three years in the period
                ended September 30, 2001 | 23
| | - |  | ------------------------------------------------------------------------------------------------------------------------ | --

| |  |  | Notes to Consolidated Financial Statements | 24-33
| | - |  | ------------------------------------------ | -----

| |  | (2) |  | Financial
Statement Schedules
| |  | --- |  | -----------------------------

| | Schedule
IIValuation and Qualifying Accounts for the three years endedSeptember 30, 2001 | 38
| | ----------------------------------------------------------------------------------------- | --

| | All
other schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission have been omitted because they are not required,
are inapplicable or the information is included in the Consolidated Financial Statements
or Notes thereto.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|34
|--

|
|

| |  | (3) |  | Exhibits
| |  | --- |  | --------

| |  |  |  | 3(a) |  | Articles
of Incorporation, as amended, are incorporated by reference to Exhibit 3 of the
Registrants Form 10Q for the quarter ended December 31, 1996 | 
| |  |  |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  |  |  | 3(b) |  | Bylaws,
as amended, are incorporated by reference to Exhibit 3(b) of the Registrants Form S-1
Registration Statement dated June 19, 1986 (Commission File No. 33-6594) | 
| |  |  |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(a) |  | 1983
Employee Incentive Stock Option Plan is incorporated by reference to Exhibit 4(a) of the
Registrants Form S-8 dated June 3, 1987 (Commission File No. 33-14776) | 
| |  |  |  | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(b) |  | 1987
Employee Stock Option Plan, as amended, is incorporated by reference to Exhibit 4(a) of
the Registrants Form S-8 dated March 17, 1989 (Commission File No. 33-27530) | 
| |  |  |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(c) |  | Innovex,
Inc. and Subsidiaries Employees Retirement Plan is incorporated by reference to Exhibit
10(i) of the Registrants Form 10-K for the year ended September 30, 1992 | 
| |  |  |  | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(d) |  | 1994
Stock Option Plan, as amended, is incorporated by reference to Exhibit 4.1 of the
Registrants Form S-8 dated May 27, 1999 (Commission File No. 333-79427) | 
| |  |  |  | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(e) |  | Innovex,
Inc. Employee Stock Purchase Plan is incorporated by reference to Exhibit 4.1 of the
Registrants Form S-8 dated May 19, 2000 (Commission File No. 333-37380) | 
| |  |  |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(f) |  | Innovex,
Inc. Restricted Stock Plan is incorporated by reference to Exhibit 4.1 of the
Registrants Form S-8 dated August 23, 2001 (Commission File No. 333-68228) | 
| |  |  |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  |  |  | 10(g) |  | Form
of Employment Agreement between certain executive officers and the Company is
incorporated by reference to Exhibit 10(g) of the Registrants Form 10-K for the year
ended September 30, 1996 | 
| |  |  |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(h) |  | Agreement
and Plan of Merger, dated July 1, 1999, by and among ADFlex Solutions, Inc. and Innovex,
Inc. and Innovex Acquisition Corp. is incorporated by reference to Exhibit (c)(1) of the
Registrants Schedule 14(d)(1) filed on July 7, 1999 | 
| |  |  |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  |  |  | 10(i) |  | Lease
dated June 28, 1993 between ADFlex Solutions, Inc. and TL Properties, Inc. and the First
Amendment to Lease, dated June 1994, incorporated by reference to the ADFlex Solutions,
Inc. Registration Statement on Form S-1 (SEC file No. 33-80324) or amendments thereto,
filed on June 16, 1994 | 
| |  |  |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(j) |  | Credit
Agreement dated as of September 15, 1999 among Innovex, Inc. as Borrower and the Banks
Named Herein, as Banks, and Norwest Bank Minnesota, N.A., as Agent is incorporated by
reference to Exhibit 10(i) of the Registrants Form 10-K for the year ended September 30,
1999 | 
| |  |  |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(k) |  | First
Amendment to Credit Agreement is incorporated by reference to Exhibit 10(j) of the
Registrants Form 10-K for the year ended September 30, 2000 | 
| |  |  |  | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(l) |  | Second
Amendment to Credit Agreement is incorporated by reference to Exhibit 10 of the
Registrants Form 10-Q for the quarter ended December 31, 2000 | 
| |  |  |  | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(m) |  | Third
Amendment to Credit Agreement is incorporated by reference to Exhibit 10(a) of the
Registrants Form 10-Q for the quarter ended March 31, 2001 | 
| |  |  |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(n) |  | Fourth
Amendment to Credit Agreement is incorporated by reference to Exhibit 10(a) of the
Registrants Form 10-Q for the quarter ended June 30, 2001 | 
| |  |  |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 10(o) |  | Fifth
Amendment to Credit Agreement | E39-43
| |  |  |  | ----- |  | ----------------------------------- | ------

| |  |  |  | 10(p) |  | Credit
Facilities Agreement between Innovex (Thailand) Limited as the Borrower and The
Industrial Finance Corporation of Thailand and Bank of Ayudhya Public Company Limited as
the Creditor is incorporated by reference to Exhibit 10(b) of the Registrants Form 10-Q
for the quarter ended March 31, 2001 | 
| |  |  |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  |  |  | 21 |  | Subsidiaries
of Registrant | E44
| |  |  |  | -- |  | -------------------------- | ---

| |  |  |  | 23 |  | Consent
of Grant Thornton LLP | E45
| |  |  |  | -- |  | ----------------------------- | ---

|35
|--

|
|

|(b) |  | REPORTS
ON FORM 8-K
|--- |  | -------------------

| | Form
8K and 8K/A were filed on August 20, 1999 and October 19, 1999 relating to the
acquisition of ADFlex Solutions, Inc.
| | -------------------------------------------------------------------------------------------------------------------------

|(c) |  | EXHIBITS
|--- |  | --------

| | Reference
is made to Item 14 (a) 3
| | ----------------------------------

|(d) |  | SCHEDULES
|--- |  | ---------

| | Reference
is made to Item 14 (a) 2
| | ----------------------------------

|36
|--

|SIGNATURES


Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | INNOVEX, INC.By   \s\ WILLIAM P. MURNANE       
       William P. MurnanePresident and Chief Executive Officer
| |  | ----------------------------------------------------------------------------------------------------------------------------

|Date December 14, 2001 |  | By   \s\ THOMAS PAULSON       
       Thomas PaulsonChief Financial Officer
|---------------------- |  | -----------------------------------------------------------------------------------------

|Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on this 11th day of December, 2001.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|\s\  WILLIAM P. MURNANE
       William P. Murnane | President, Chief Executive Officer and Director
           (Principal Executive Officer)
|-------------------------------------------------------------- | ----------------------------------------------------------------------------------------

|\s\  THOMAS PAULSON
       Thomas Paulson | Chief Financial Officer(Principal Financial Officer)
|------------------------------------------------------ | ----------------------------------------------------

|\s\  THOMAS W. HALEY
       Thomas W. Haley | Chairman and Director
|-------------------------------------------------------- | ---------------------

|\s\  GERALD M. BESTLER

       Gerald M. Bestler | Director
|------------------------------------------------------------- | --------

|\s\  FRANK L. FARRAR

       Frank L. Farrar | Director
|--------------------------------------------------------- | --------

|\s\  ELICK EUGENE HAWK

       Elick Eugene Hawk | Director
|------------------------------------------------------------- | --------

|\s\  MICHAEL C. SLAGLE

       Michael C. Slagle | Director
|------------------------------------------------------------- | --------

|\s\  BERNT M. TESSEM

       Bernt M. Tessem | Director
|--------------------------------------------------------- | --------

|37
|--

|INNOVEX INC. AND
SUBSIDIARIES



SCHEDULE II 
VALUATION AND QUALIFYING ACCOUNTS



For The Three Years
Ended September 30, 2001
|--------------------------------------------------------------------------------------------------------------------------------

|Description                            | Balance atBeginning ofPeriod | Charged toCosts andExpenses | Charged toOtherAccounts Describe | DeductionsDescribe | Balance atEnd ofPeriod
|-------------------------------------- | ---------------------------- | --------------------------- | --------------------------------- | ------------------ | ----------------------
|Miscellaneous valuation and qualifying |                              |                             |                                   |                    |                       
|accounts (a)                           |                             
|Year ended September 30, 2001          |                              | $   797,000                 |                                   |                   |                       
|Year ended September 30, 2000          |                              | 2,151,000                   |                                   |                   |                       
|Year ended September 30, 1999          |                              | 445,000                     |                                   |                   |                       

|(a)   Additions, deductions and
balances were not individually significant.
38
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